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UK regulator now backs key Solvency II measure

Andrew Bailey, the CEO of the UK's Prudential Regulatory Authority (PRA), has indicated that he now broadly supports the Solvency II proposals relating to long-term liabilities.

Speaking at the Association of British Insurers conference in London last week (9 July), Bailey said the EU study of long-term products confirmed that the matching adjustment was a "prudent measure".

The matching adjustment, whereby predictable liabilities may be matched with assets at a reduced discount rate, has faced criticism from European insurers, particularly in Germany and France.

Prudential group CEO Tidjane Thiam added to the criticism while speaking at the same event, calling for "a matching adjustment that works", as in its current form it does not.

Insurers have also criticised the narrow range of assets that are eligible to be matched, pushing up the capital charges on risky assets and making downgrades of long-term portfolios more likely.

Acknowledging these criticisms, Bailey commented: "We recognise that some restrictions are needed for the classic matching adjustment to be an effective and prudent measure."

He said he would continue to push for a prudent solution that meets the needs of UK insurers and allows for the continued issuance of annuities to policyholders.

The comments are a step forward from February, when he wrote to the UK Parliament's Treasury committee, criticising the uncertainty, cost and delay of Solvency II.

He said he had no regrets in ruffling a few feathers. "We still have a good way to go to make the Solvency II regime manageable in its use and implementation," he added.

He pointed to plans regarding internal models and the transitional period, which the German insurance regulator wants to extend to longer than seven years.

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