Tuesday, July 16

Britain’s biggest insurers get green light for European capital plans



Bank of England has approved Solvency II internal risk models for 19 insurance companies.

Nineteen insurance companies have won approval for their plans to protect themselves against financial shocks, in what the Bank of England has described as a “major milestone” for the stability of the industry.

Aviva, Prudential, Standard Life and Legal & General are among the FTSE 100 firms to secure approval from the watchdog for their customised “internal models”, allowing them to use their own methods of calculating risks within the business to set up capital buffers.

The Bank of England has not revealed which insurers have won full approval for their plans to meet the new Europe-wide Solvency II requirements, and which firms have only received a green light for parts of their business.

Other insurers will adopt the Bank’s “standard model”, which could see them hold more capital than they had planned if parts of their business are deemed particularly risky, although for simple insurers with one specialism this could be a cheaper option.

Andrew Bailey, head of the Bank’s Prudential Regulation Authority (PRA), said the approvals marked a “major milestone in the implementation of Solvency II in the UK”, which comes into force on January 1 after more than a decade of planning.

“Going forward we will monitor insurers’ models carefully in order to ensure they continue to deliver an appropriate level of capital.”

Just Retirement said it had won full approval, meaning its planned merger with fellow annuity specialist Partnership Assurance has passed another hurdle and is on track to close early next year.

Amlin, which is in the throes of a £3.5bn takeover by the Japanese outfit Mitsui, was also on the approved list. “The approval is testament to the years of meticulous planning and preparation and has a material benefit to our solvency capital requirements. This greater certainty will position the business well for the future and we look forward to the competitive advantages that adopting the model will bring,” said Charles Philipps, chief executive.

Like the Basel rules for the banks, Solvency II requires all big European insurers to hold enough assets to ensure they can keep paying out to customers if the financial system faces another crisis.

“Those which gain full approval will begin next year with the benefit of having the certainty of optimal capital requirements and the reputational benefits of operating with a capital model that has passed the ultimate test,” said Jim Bichard, UK Solvency II leader at PwC.

Some companies, including Direct Line and Admiral, have decided to delay their internal model applications, and will operate on the standard model for at least six months before seeking approval for their plans.

About 120 companies had initially hoped to have internal models signed off in time for the rule change, but this has been whittled down through more than a year of consultation with the PRA. The regulator has not diclosed which companies dropped out of the process.

“Where the PRA has not approved an insurer’s application for approval of their internal model, whether for a full or partial internal model, the insurer will have to use the standard model which may reduce their capital strength,” said Bruno Geiringer an insurance partner at Pinsent Masons.

“In that event, these insurers may either become vulnerable for take-over or need to restructure their businesses so that they manage the business on a more capital-lite basis with less emphasis on sales of capital intensive products such as annuities.”

Insurers have haggled with the watchdog about exactly which assets counted as capital that could be used in a one-in-200-year crisis to ensure customers are paid in full for the insurance or pensions they bought.

There are numerous quirks in the rules, requiring firms to tweak parts of their multi-billion pound balance sheets. While insurers have been encouraged to invest in long-term infrastructure projects, for example, these assets may not be eligible as Solvency II capital because they cannot be easily priced or sold on.

For those firms that have gone all the way with their internal models, the cost of creating risk programmes and suitable computer systems can run into hundreds of millions of pounds each.

Efforts to set up a unified set of rules for the biggest insurers in Europe have been more than a decade in the making. A replacement for Solvency I was formally created in an EU directive in 2009, only for the aftermath of the financial crisis to prompt a rethink on many of the details.

The Bank of England’s Paul Fisher said almost a year ago that the industry appeared well-prepared for the rule change and the regulator did not expect a big rush to raise additional funds because of the new regime.

The UK-based insurers are already expected to hold high levels of capital under the ICAS rules, meaning the switch to Solvency II is unlikely to require a major business overhaul.

There has been a greater effect felt in some European outfits, however. The Dutch insurer Delta Lloyd last week announced a €1bn rights issue to help cover its capital bases ahead of the rule change. Meanwhile, the French insurer Axa said that it will raise its dividend target, having comfortably met its regulator’s requirements.

Meanwhile, the German giants Munich Re and Allianz have said their internal models have been approved by the local regulator.

The full list of firms to win full or partial approval from the Bank of England is:

• Amlin Plc

• Aspen Insurance UK Ltd

• Aviva Plc

• British Gas Insurance Ltd

• Just Retirement Ltd

• Legal & General Group Plc

• Markel International Insurance Company Ltd

• MBIA UK Insurance Ltd

• The National Farmers’ Union Mutual Insurance Society Ltd

• Pacific Life Re Ltd

• Pension Insurance Corporation Plc

• Phoenix Group

• Prudential Plc

• QBE European Operations Plc

• RSA Insurance Group Plc

• Scottish Widows Group

• Society of Lloyd’s

• Standard Life Plc

• Unum European Holding Company Ltd