By Tim Wallace
Britain’s powerful insurance industry has been hamstrung by EU regulations and will become stronger and more competitive once Brexit takes place, financial services bosses believe.
Tough regulations called Solvency 2 have been implemented differently in each country around the EU, with the result that British firms have to hold far more capital than their continental rivals, pushing up costs and harming business.
“Solvency 2 was meant to create a pan-European harmonisation of regulation, it absolutely hasn’t. We have sold our Irish, French, Dutch, German and Italian businesses over the past two or three years,” said Nigel Wilson, chief executive of Legal & General.
“There is a greater chance of us entering the EU market in a post-Brexit world where, bizarrely, we will have much more of a level playing field than we have pre-Brexit.”
Those rules currently force UK firms to hold two or three times more capital than their French or German rivals, pushing up costs – annuities, for example, cost 5pc more than they would otherwise do, L&G estimates.
He was speaking to the Treasury Select Committee of MPs, where he was joined by insurance bosses including Julian Adams, group regulatory director at Prudential.
“The problem you have with Solvency 2 is that it was a compromise between 28 different countries,” said Mr Adams.
“Our policy priority should surely be that we have a regime that is appropriate for the UK.”
However, not all of those rules can be changed without going via Brussels and the UK’s Prudential Regulation Authority is currently assessing its options.
Once the UK is out of the EU, it will no longer be restricted and so can adopt rules more suited to British companies and their customers.
Mr Wilson also wants the PRA to change the rules on the capital that insurers have to hold against their investments.
Currently it is much cheaper for L&G to invest in US Treasuries, for example, than to hold assets such as property or infrastructure in the UK, because the regulator deems those assets to be far more risky than the government debt.
If the rules were changed to reduce the gap in official risk designations, Mr Wilson argues he could invest as much as £15bn more in new British assets.
“We have regulation which encourages us to buy US bonds, German bonds and particularly sovereign bonds, even Greek bonds, in preference to UK assets – that cannot be a good outcome from a UK point of view,” said Mr Wilson.
“We want to invest in new, real assets that create jobs in the UK. We have done about £8bn so far, but we could do a lot more.”