No Brexit bonanza in UK’s insurance reforms

Boris Johnson’s Conservative government, desperate to show the benefits of quitting the European Union, has called for an “investment big bang”: He’ll clear regulatory obstacles so that pension funds and insurers can channel tens of billions of additional pounds into modernising Great Britain and raising living standards.
But the upcoming overhaul of capital rules for insurers has little to do with Brexit and likely won’t be a bonanza for shareholders or investment.
Reform has been under discussion since last year and the government is close to agreeing to changes with regulators and the industry, according to the Financial Times. The pitch is that Britain is now free to scrap European rules that restrict insurers’ ability to pour money into things like green infrastructure or better housing.
The changes could help reduce some of the costs related to investing in such things, but Britain’s big life insurers already have almost one-third of their relevant funds in illiquid assets like these; the rest is mainly investments in publicly traded bonds.
One of Britain’s biggest life companies, Legal & General Plc does a lot of this kind of investing and is known for the social goals set by its chief executive officer, Nigel Wilson, who was born in the deprived northeast of England.
L&G has nearly 30% of its roughly 100 billion pounds ($136 billion) of life insurance-related funds in illiquid assets and wants to lift that to as much as 50%. Rivals like Aviva Plc, Phoenix Group Holdings Plc and M&G Plc have a similar mix of assets and similar intentions.
The industry says regulatory reform will help accelerate the process, but the real limit on these ambitions is creating or finding enough suitable assets. Tweaking insurance capital rules isn’t going to create new wind farms in the North Sea overnight.
The regulations, known as Solvency II, were adopted while Britain was in the EU, but their core principles mimicked pre-existing British rules, which were designed to judge whether insurers have enough capital based on the riskiness of their assets and liabilities. Many other countries have since created similar regimes.
The kinds of products sold by life-insurance and pensions firms vary by country across Europe. So, when Solvency II was created, it had to be tailored to each country’s needs. For the UK, the rules were written to fit long-term annuities, a mainly British product that pays people a steady income for life after retirement. They won’t be torn up because they must still balance the long-term interests of policyholders against short-term profits for shareholders.
The rules are complex and make significant assumptions about the far-off future, so a large amount of prudence is required. When navigating by compass, not much can go wrong over 100 meters, but over 100 kilometers you can end up very far from where you meant to be.
Investing in assets that pay regular income over a long duration marries well with annuities because they make long-lasting and predictable payments to policyholders. The fixed nature of annuity claims, unlike, say, claims for house fires, also means these assets don’t need to be easily tradeable.

—Bloomberg