Insurance industry: a post-Brexit Big Bang?

Jacob Rees-Mogg: ‘reality-bending powers’

(Image credit: Daniel Leal-Olivas/AFP/Getty Images)

published 25 February 2022

How’s Britain’s Brexit bounceback going? Not so well, according to one Tory grandee, said Michiel Willems in City AM. The former party leader Iain Duncan Smith opined that, more than two years after quitting the EU, the Government has done “sweet FA” to exploit opportunities and shift the most “burdensome” EU regulations. Corporate leaders, meanwhile, have rounded on the newly appointed Brexit Opportunities Minister, Jacob Rees-Mogg, for claiming that – despite a £20bn collapse in UK to EU exports last year – “evidence that Brexit has caused trade drops is few and far between”. As one ParcelHero executive put it, the minister seems to be calling upon “the reality-bending powers of Marvel’s Dr Strange”.

Jacob Rees-Mogg on mission to ‘turbo-charge’ the benefits of Brexit

There’s at least one solid good news story that Rees-Mogg can trumpet, said The Daily Telegraph. The Government’s plan to ditch the “controversial Solvency II rulebook” governing insurers is a big step forward in the drive to scrap EU red tape. Some predict it could unleash “an £80bn Brexit Big Bang” in the City, spurring investment in the UK economy. Insurers and pension funds have claimed “their hands are currently tied” by the rules, which restrict “how much they can plough into illiquid assets like infrastructure”. It was either “polite, or canny” of big insurers like L&G and Aviva to play along with the spin that this is some kind of Brexit “bonfire of red tape”, said Nils Pratley in The Guardian. The reality is that the EU was “quicker to signal its own bonfire”: it announced a review of the rules last September. Still, reform is welcome. It’s difficult for the layperson to steer through the technical jargon of “matching adjustments” and “solvency capital requirements”, but the insurers’ trade body, the ABI, has offered a good illustration of the “perverse incentives” created by Solvency II: it is currently much easier for a pension fund managed by an insurer “to invest in a highly rated mining company than it is to invest for 30 years in a wind farm”. It’s hard to fathom how that status quo is supposed to protect policyholders.

Still, reform is no silver bullet, “and likely won’t be a bonanza for shareholders or investment”, said Paul J. Davies on Bloomberg. The real limit on insurers’ ambitions is finding enough suitable assets. “Tweaking insurance capital rules isn’t going to create new wind farms in the North Sea overnight.” There are also risks. “Britain’s original risk-based insurance rules were created after the dot-com bubble burst and nearly ruined much of the industry, which had loaded up on stocks.” In a world “awash in debt”, the Government “should be very careful about letting insurers release capital or take more risks”.