Solvency II Review: Willis Towers Watson responds to HM Treasury Call for Evidence

LONDON, 19 February 2021 – Willis Towers Watson has today responded to the UK Government’s call for evidence on its review of Solvency II. With the Brexit transition period now expired, HM Treasury is considering areas of Solvency II that could better reflect the particular structures, products and business models of the UK insurance sector. Willis Towers Watson supports the stated objectives of HM Treasury’s review, which are to make sure that the UK’s future regulatory regime supports an internationally competitive insurance sector, protects policyholders and supports insurance firms to provide long-term capital to support growth.

Kenny McIvor, a Director in Willis Towers Watson’s Insurance Consulting and Technology business, said: “There is little appetite for significant upheaval given how much UK re/insurers have already invested in implementing the regulatory regime. Instead, changes should be targeted at aspects of Solvency II that are poorly designed or imperfectly calibrated for the UK. Essentially, any reforms should also meet the needs of three main stakeholders: consumers, capital providers and government working on behalf of society.”

Willis Towers Watson, which works closely with and supports UK and continental European insurance firms with Solvency II, has submitted a detailed response to HM Treasury, including five key recommendations for change:

• Improvements to reporting and disclosures: Public disclosures should continue to be improved in the areas of sensitivities and analysis of movement, with unnecessary information requirements reduced.
• Transition to Sterling Overnight Index Average (SONIA) swaps for the basic risk-free rate: The transition to SONIA swaps is a missed opportunity to allow Gilts as an option for the discount rate basis. Incentivisation towards one reference rate over another creates the potential for distortion.
• Asset eligibility criteria and design of the Matching Adjustment: Greater flexibility and balance is needed when setting the criteria for the eligibility of assets that can be used to back insurers’ long-term liabilities.
• Underlying principle and calibration of the Risk Margin: We advocate a revisit of the Risk Margin principle, reflecting that liabilities and backing assets are managed and transacted as blocks of business.
• Standard Formula suitability and the operation of Internal Models: A better tailored Standard Formula approach is necessary to reduce pressure to adopt an Internal Model. The PRA should also be able to give a capital add-on without triggering a disproportionate requirement for a firm to develop an Internal Model.

Kenny McIvor said: “Our response is based both on Willis Towers Watson’s role as an advisor and as a leading provider of actuarial technology and actuarial outsourcing. The latter of these responsibilities puts us in the unique position of having to implement regulatory requirements ourselves, meaning we have a direct insight into the needs and interests of our insurance clients.

“We believe that our recommendations to improve the prudential regulatory framework will help the UK Government meet its objectives, and will ensure that the rules are appropriately tailored for the UK re/insurance market.”

About Insurance Consulting and Technology

Willis Towers Watson’s Insurance Consulting and Technology business has over 1,200 colleagues operating in 35 markets worldwide. It is a leading provider of advice, solutions and software – primarily to the insurance industry. Its consulting services help clients manage risk and capital, improve business performance and create competitive advantage – by focusing on financial and regulatory reporting, enterprise risk and capital management, M&A and corporate restructuring, products, pricing, business management and strategy.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving in more than 140 countries and markets. We design and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas – the dynamic formula that drives business performance. Together, we unlock potential.