Solvency II reform proposals need further work as they could risk “penalising pension customers”, the Association of British Insurers (ABI) has warned.

In response to the government’s consultation on Solvency II reform proposals, the ABI cautioned that the current regime offers strong and adequate protections and that the proposals for insurance firms to hold more capital risks driving up costs for consumers.

A key government objective for the reform of Solvency II is to help insurance firms “provide long-term capital to support growth, including investment in infrastructure”, which would benefit customers through " levelling up of the economy and boosting the transition to a greener UK", the ABI stated.

However, according to the ABI, its analysis indicated that the current proposals would not achieve the suggested release of 10-15 per cent of capital re-investment. Life insurance firms would have to hold more capital than currently required, "preventing them from being able to provide the funds that are needed for investment across the UK", the association warned.

"Increases in capital are not costless. Rather, they are paid for by customers through lower returns and by society through less investment in productive assets," it added.

The ABI stated that it still welcomed many of the changes already proposed, such as risk margin reform and broadening the eligibility of liabilities and assets to benefit from the matching adjustment as it will “widen the portfolio of projects that insurers can invest in”.

"This will increase UK investment in much-needed areas whilst also allowing more diverse investment portfolios, which ultimately improve policyholder protection. However, any positive benefits will be more than offset by the adverse consequences of the proposed reforms to the Fundamental Spread," it added.

"We have listened carefully to the Prudential Regulation Authority on the crucial issue of the calculation of the Matching Adjustment. However, the burden of proof for reform, which could increase regulatory capital requirements and operational complexity but reduce capital resources, would need to be extremely strong, and we have seen no evidence that would justify taking such measures."

ABI director general, Hannah Gurga, commented: “We all want to see reform of the Solvency II regime that works best for the needs of the UK and enables investment at a crucial time.

“The insurance and long-term savings industry could invest more capital to help level up the UK, boost the economy and support the transition to net zero.

“The current proposals do not realise that opportunity and would risk penalising pension customers as a result of the increased costs associated with the proposed reforms. We are committed to working with the government and the PRA to find a solution that meets all of our objectives.”

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