Solvency UK: What it is and why it matters
Five years post-Brexit and the UK is reforming Solvency II. It’s likely to be one of the most strategic changes for insurers and long-term savings institutions the sector has ever seen. Known as Solvency UK, this reform marks a significant change in how insurers will manage capital, risk and investment in the future. Aimed at aligning regulation with the UK’s specific domestic economic priorities and risk environment, it’s a strategic move, with significant operational, financial and reporting implications.
The background: From Solvency II to Solvency UKFor CFOs and senior financial leaders, understanding what this means is essential, not only for ensuring compliance but also for identifying the opportunities that the new framework will potentially bring. Solvency UK will impact capital planning, investment strategies, risk governance and reporting frameworks across the industry. Here’s our guide to what firms need to understand about the framework.
The Background: From Solvency II to Solvency UK
Solvency II was originally introduced across the EU in 2016 to standardise insurance regulation, improve consumer protection and ensure that firms held sufficient capital to remain solvent during difficult financial periods. While it succeeded in increasing transparency and strengthening capital requirements, it was often criticised by UK insurers who found the regime to be overly complex, costly to maintain and not always well-suited to the types of long-term business found in the UK, such as annuities and infrastructure investment.
Now that the UK has left the EU, the government has taken the opportunity to reshape the rules and build a better system, more suited to its domestic market and long-term economic goals. HM Treasury’s review of Solvency II culminated in a package of reforms announced in 2022 which were aimed at supporting growth, unlocking investment and maintaining high standards of policyholder protection.
The Prudential Regulation Authority (PRA) is now tasked with implementing these changes which represent the biggest shake-up of insurance regulation in the UK since the original EU directive came into force.
There are three main aims driving these changes:
- Promoting growth and investment – the government wants to unlock more capital from insurers’ balance sheets, enabling greater investment in areas such as housing, infrastructure and green energy.
- Maintaining prudential soundness and policyholder protection – the reforms seek to maintain high standards of financial stability and to protect consumers, even as the rules become more flexible.
- Increasing the UK’s regulatory autonomy and flexibility – the UK aims to build a regulatory approach that is more agile and responsive to domestic needs, balancing innovation with robust supervision.
The goals are ambitious and navigating the balance between them will be crucial in the implementation phase.
Key changes and their implications
The Solvency UK package introduces a number of substantial reforms, including:
Risk margin reduction – one of the most significant and welcome changes is the proposed reduction in the Risk Margin (a capital buffer that insurers must hold in addition to their core solvency) by 65% for life insurers and 30% for general insurers. This adjustment better reflects the true cost of transferring insurance liabilities and, for many firms, it should release considerable equity.
Matching Adjustment reform – another major area of reform is the Matching Adjustment (MA). This will see broader eligibility criteria and changes to its calculation, including an allowance for notched credit ratings, and a more dynamic risk allowance. These changes could unlock significant capital for insurers with annuity portfolios, but will require tighter governance and evidence of effective risk management.
Increased PRA role – Solvency UK will give the PRA more control over rulemaking. This means that instead of relying on rigid, legislation-based rules, the PRA can respond more quickly to emerging risks and evolving market practices. For firms, this increases the importance of maintaining strong regulatory relationships and staying ahead of new guidance as it emerges.
Streamlined reporting requirements – the reforms also promise to reduce the administrative burden on smaller and less complex firms. Reporting requirements are being streamlined, which may lower compliance costs and free up internal resources for more strategic activity.
When will this happen?
Implementation of Solvency UK is already underway but is being phased in. The PRA closed its main consultation on implementing the matching adjustment reforms in 2023, with final rules determined in 2024. Risk Margin and reporting reforms are scheduled to be introduced in stages throughout 2025.
This means that for CFOs this year is the critical time for planning, modelling and execution. The timeline may feel tight, however, particularly given the need for system changes, Board-level approvals and revised reporting processes.
What CFOs and senior finance leaders need to do now
To navigate this transition confidently, senior finance professionals should take proactive steps now:
- Get to grips with the detail – familiarise yourself and your team with the PRA consultation papers and forthcoming policy statements
- Assess the impacts of your capital and investment strategy – scenario planning is essential. Model how the revised Risk Margin and MA affect your capital position and investment flexibility
- Enhance governance and internal controls – it’s critical to ensure that your internal governance, documentation and decision-making processes are strong as firms will need robust evidence of sound risk-management and documentation
- Talk to your board – if you haven’t already started a conversation with your Board and stakeholders about what the reforms could mean for your business and long-term plans, start now
- Engage early with the regulators – early dialogue with the PRA is recommended to help clarify expectations, reduce the risk of misinterpretation and to build trust ahead of implementation
- Plan for implementation – set up cross-functional working groups to assess system changes, resource needs and training requirements.
Summary
Solvency UK is not just a rebranding or regulatory exercise. It marks a shift in how the UK views insurance regulation, not just as a tool for prudential oversight but as a strategic opportunity for economic growth and innovation. Firms that engage early and strategically will not only remain compliant but may find themselves better positioned to deploy capital, support long-term investment and strengthen their market position. CFOs and senior finance leaders who take the time to understand, anticipate and prepare for these changes will be best placed to turn compliance into competitive advantage.
Next time we’ll be looking at the practical steps insurers can take to self-assess their readiness for Solvency UK reforms.
Brighter Consultancy supports leading UK insurers in navigating reform with clarity and confidence. For tailored insights or a readiness assessment, get in touch with our team.
