Industry experts have welcomed proposed reforms to Solvency II, confirmed as part of the government’s Autumn Statement, with estimates that this could unlock over £100bn worth of investment in productive finance.

Following its recent consultation on Solvency II, the government confirmed plans to reduce the risk margin by 65 per cent for life insurers and 30 per cent for non-life insurers.

The government also confirmed plans to broaden the asset and liability eligibility criteria for the matching adjustment, to allow the inclusion of assets with highly predictable cashflows, subject to a number of safeguards which the Prudential Regulatory Authority (PRA) will implement.

The existing methodology and calibration of the fundamental spread will be maintained however, while allowing for the use of notched ratings.

The reforms aim to strike a balance between protecting policyholders, supporting insurance firms to provide long-term capital to support growth, and driving a “vibrant, innovative, and internationally competitive insurance sector”.

Industry organisations have broadly welcomed the reforms, with the Association of British Insurers (ABI) estimating that “meaningful reform of the rules creates the potential for the industry to invest over £100bn in the next ten years in productive finance, such as UK social infrastructure and green energy supply”.

"We strongly welcome these changes to the Solvency II regime which will allow the UK insurance and long-term savings sector to play an even greater role in supporting the levelling up agenda and the transition to net zero,” stated ABI director general, Hannah Gurga.

“More broadly, it will encourage a thriving and competitive industry which will ultimately benefit the UK economy, the environment and customers.”

Pension Insurance Corporation CEO, Tracy Blackwell, also suggested that the changes will provide “stability to support the government’s objective of investing in productive assets whilst ensuring that policyholder pensions are secured to the highest standards”.

“We now have the certainty we need to bring more pension risk off corporate balance sheets and invest in assets that generate economic growth and benefit communities across the country,” she said.

This was echoed by Phoenix Group CEO, Andy Briggs, who highlighted the reforms as “a very significant opportunity to ensure more private sector capital can be directed by insurers into the real economy and ensure we better mobilise the UK’s £3.4trn of pension wealth”.

Hymans Robertson risk transfer partner, Michael Abramson, explained that the reforms are also likely to modestly reduce overall capital requirements for bulk annuity insurers, as well as broadening the assets that they can use to invest in.

He continued: “While a reduction in capital requirements may mean less security for policyholders, the areas that have been addressed are ones that arguably were difficult to justify to begin with.

“The reforms also set out some additional powers for the PRA that should serve to manage any potential risks associated with a relaxation in capital requirements.

“Overall, the changes may help to stimulate innovation in a buy-in and buy-out market where demand is expected to grow significantly, as well as encourage a slight improvement in pricing, all within a framework that still provides a high level of security for pension schemes and their members.”

Indeed, Mercer principal and actuary, John Gething, suggested that the reforms will mean “good news for insurers and, in turn, may be welcomed by pension schemes looking to purchase a bulk annuity”.

“At a time when many schemes have moved within touching distance of being able to transact, it will be interesting to see how far and fast any price reductions come through from insurers being able to invest in a wider range of assets," he stated.

Adding to this, Pinsent Masons Pensions Partner Robert Tellwright, suggested that scheme trustees considering a bulk annuity transaction should consider, with their advisers, what impact these reforms are likely to have on insurers’ financial strength, capital position, and pricing.

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