Commenting on the Solvency II consultation published by the PRA today, Michael Abramson, Partner and Risk Transfer Specialist, Hymans Robertson, said:

"The Government has previously made much of Solvency UK giving more flexibility to invest in long-term productive assets like infrastructure. Today’s PRA consultation puts meat on the bones of this flexibility, although insurers may feel that the meat is rather lean. The PRA proposals set out which types of assets would newly be eligible, along with a limit of such assets such that they cannot provide more than 10% of the portfolio benefit and various other restrictions. However, with nearly £300bn of assets held in matching adjustment portfolios overall and plenty of demand for bulk annuities, this could provide a modest boost to certain sectors over time.

“Some pension schemes considering an insurance buy-out will have been hoping that these asset freedoms will allow insurers to take on their illiquid assets. There may be some instances where the proposals would facilitate this, but given the various limitations, it will be no panacea.”

Commenting on the newly released consultation, Review of Solvency II: Reform of the Matching Adjustment, Bob Tyley, Head of Credit Risk, Insurance & Financial Services, Hymans Robertson says:

“A primary objective of the Solvency II reform is to increase the potential for Insurers to invest in new asset classes. These proposals open up that possibility by allowing up to 10% of the Matching Adjustment benefit to be delivered by assets that previously would not be eligible. However there are going to be extensive requirements on these assets that could hinder the ability of insurers to take full advantage of that.

“At the same time, it is no secret that the PRA believes that the Fundamental Spread needs increasing to better cover all the risks retained by the insurer. These proposals will achieve that aim, for current assets as well as new ones. Meanwhile the industry has been waiting for the proposal for the new Matching Adjustment Attestation with some trepidation, and it appears that their fears have been realised. The process will be onerous, it appears designed to lead to a decrease in MA benefit received and is likely to prove controversial.”