The current design of the SII risk margin is too interest-rate sensitive and too high, particularly in the current low-interest rate environment. We believe reform, and an overall reduction, in the risk margin is desirable and can be done whilst keeping an appropriate balance between policyholder protection and cost.
The Matching Adjustment (MA) is vitally important to UK insurers, UK pension schemes and individuals. Without it, annuity prices would increase, and it would simply not be affordable for many pension schemes to buy-out with an insurance company. The IFoA fully supports the continued inclusion of the MA; the MA has successfully helped reduced
procyclical investment behaviour, such as during the stressed conditions in early 2020. However, we believe that the MA framework needs to incorporate more pragmatic flexibility, without a lowering of regulatory standards.
We favour incentivisation of ‘green’ investment rather than overly penal disincentives for ‘brown’ asset classes, noting that sectors considered ‘brown’ must also be part of the solution to the challenges of climate change.
Author(s): Institute and Faculty of Actuaries
Publication Date: 19 February 2021
Publication Site: Institute and Faculty of Actuaries
Solvency II sets strict requirements over what kinds of liabilities and assets are eligible for the MA [matching adjustment], and the governance of them. In the UK’s Solvency II consultation, respondents have argued a looser regime would be good for insurers – and good for the country.
Many of these suggestions have been previously floated in industry circles, some since even before Solvency II came into effect in 2016. But there are a growing number of experts calling for a much more dramatic rethink of the MA – and whether it should even exist.
Dean Buckner, a former regulator at the Bank of England who worked on the MA, and Kevin Dowd, professor of finance and economics at Durham University, have been at the forefront of arguing the MA creates “fake capital” and puts annuity payments at risk.
In their submission to the consultation, they write: “The MA allows firms to recognise some anticipated risky future profits as if they were certain, thereby allowing them to be distributed before being realised. If the risky future profits are not realised – bear in mind that they are called ‘risky’ for a reason – then the capital created by MA will vanish, and policyholders will be at risk.”
Author(s): Christopher Cundy
Publication Date: 23 February 2021
Publication Site: Insurance ERM