PRA consults on matching adjustment reforms: new-found freedoms or simply different chains?

The PRA’s latest consultation on reforming the UK’s insurance regulatory regime proposes a number of changes to the matching adjustment rules. This is the second PRA consultation to follow the UK Government’s Solvency II review, which confirmed that the post-Brexit Solvency II framework should be better aligned to the structural features of the UK insurance sector. The changes should also support the Government’s aim of encouraging insurers to provide more long term capital to the UK economy.

CP19/23 outlines how the PRA proposes to pull off a magic trick of sorts: allowing insurers freedom to invest in riskier assets without increasing the risk that those same insurers will run into financial difficulties.  A lot is riding on this. The Government is hoping that the Solvency II reforms, of which this consultation is a significant part, will free up billions of pounds of capital for investment. It is hoped that those investments will spur growth in the UK’s economy, and so be good for everybody in the UK.

As is generally the case with regulatory reform of this importance, the changes that insurers, and others, will welcome come with significant strings attached. There is a lot to work through in the consultation, and insurers will need to establish whether the increased costs are proportionate to the additional returns (and risks) that might accrue.

We look forward to working with insurers and our clients more generally to help them consider the proposals. The potential prize on offer is significant, and the deadline for feedback on the proposals is 5 January 2024. Now is the time to consider whether the proposals need to be changed, such that the aim of unlocking large amounts of capital to help grow the wider economy can be realised.

In our publication here, we discuss the proposed regulatory changes in further detail and provide our thoughts on the impact that these changes are set to have on insurers, as well as potential recipients of insurer finance.