Solvency UK is the post-Brexit adaptation of the EU’s Solvency II regulatory regime, tailored specifically for the UK insurance market. Following the UK’s departure from the European Union, there was a desire among policymakers and regulators to reform and simplify aspects of Solvency II to better suit the UK’s domestic insurance sector. Solvency UK aims to retain the strengths of the existing system—such as its risk-based approach and robust oversight—while reducing unnecessary complexity and enhancing flexibility for insurers, particularly those operating in long-term life and pensions business.
The UK government, along with the Prudential Regulation Authority (PRA), has proposed and begun implementing reforms that focus on several key areas. One significant change is the recalibration of the risk margin—a component of the technical provisions which insurers must hold to account for the cost of transferring their obligations to a third party. Under Solvency II, the risk margin was seen as overly conservative, especially for long-term life insurers. Solvency UK seeks to reduce the size of this margin, freeing up capital that can be used for investment, particularly in infrastructure and green projects. This is part of a broader goal to support economic growth while maintaining prudential soundness.
Another major reform relates to streamlining reporting and reducing the burden of compliance, especially for smaller or less complex firms. The UK intends to create a more proportionate regulatory environment by simplifying the rules where possible without compromising policyholder protection. There is also increased emphasis on encouraging innovation and competition in the insurance market, including support for the use of internal models for capital calculations, with potentially greater flexibility in their design and use compared to the EU’s framework.
Solvency UK represents a shift toward a more dynamic and responsive regulatory model, reflecting the UK’s ability to diverge from EU standards in favor of a system that better aligns with its domestic priorities. While the core principles of risk sensitivity, capital adequacy, and sound governance remain intact, the changes are designed to improve efficiency, unlock investment, and maintain the competitiveness of the UK insurance sector. For insurers, this means navigating a transitional period of reform but also potentially benefiting from a more tailored and growth-friendly regulatory regime.
Why did Solvency UK diverge from Solvency II
Solvency UK split from Solvency II primarily due to the United Kingdom’s departure from the European Union, combined with a desire to create a more proportionate, growth-friendly, and domestically tailored regulatory framework for the UK insurance industry. While the UK initially retained Solvency II in its entirety following Brexit, it soon became clear that there were opportunities to reform the rules to better suit the specific needs and characteristics of the UK market.
The government and UK regulators recognised that Solvency II, while providing a high standard of risk-based regulation, had also introduced complexity and rigidity that were not always proportionate to the risks posed by UK insurers. In particular, the Matching Adjustment mechanism, the Risk Margin calculation, and the overall burden on smaller firms were areas of concern. Industry stakeholders argued that some of the capital requirements were overly conservative and could discourage long-term investment, especially in areas like infrastructure and green finance, which are strategic priorities for the UK economy.
The UK Treasury and Prudential Regulation Authority (PRA) initiated reviews and consultations between 2020 and 2022 to evaluate how the regime could be adjusted to encourage innovation and investment without undermining policyholder protection. These reviews concluded that a split from Solvency II was justified in order to simplify rules, reduce reporting burdens, and unlock capital for productive use, all while maintaining a robust prudential framework.
Solvency UK therefore emerged as a modified regime that retains the core principles of Solvency II—such as risk-based capital, governance, and disclosure—but allows greater flexibility in implementation. Key changes include reforms to the Risk Margin to make it more proportionate, adjustments to the Matching Adjustment rules to enable broader asset eligibility, and a more tailored approach to internal model approvals and reporting requirements.
In summary, Solvency UK split from Solvency II as a result of Brexit and a strategic decision by the UK government and regulators to reform the insurance regulatory framework in ways that would better support domestic economic priorities, enhance proportionality, and reduce unnecessary complexity, while still upholding strong standards of policyholder protection and financial resilience.
How is Solvency UK likely to change
Solvency UK is likely to change in ways that promote investment, improve proportionality for smaller insurers, and allow greater flexibility in risk management and capital modelling, while continuing to uphold a high level of policyholder protection. The reforms aim to maintain the core principles of Solvency II—risk sensitivity, governance, and disclosure—but with adjustments tailored to the UK’s economic context and regulatory priorities.
One of the most significant changes is to the Risk Margin, a component of technical provisions designed to cover the cost of transferring liabilities in the event of insurer failure. The current Solvency II formula has been widely criticised for being overly conservative, especially for long-term life insurance business. Solvency UK intends to reduce the size of the Risk Margin significantly, especially for life insurers, which could free up capital and reduce the cost of long-duration products. The revised method is expected to better reflect real economic risks and be less sensitive to changes in interest rates.
Another important area of reform involves the Matching Adjustment, a mechanism that allows insurers to reduce capital charges when they hold assets that closely match their long-term liabilities. The UK is aiming to expand the eligibility of assets that qualify for this adjustment, including infrastructure and other productive finance investments. The goal is to encourage insurers to support long-term growth through sustainable investments, without compromising risk management standards.
Reporting and administrative requirements are also being simplified. Solvency UK is expected to reduce the frequency and detail of reporting for smaller or less complex insurers. This will help lower the regulatory burden on firms that pose minimal systemic risk, thereby making the regime more proportionate and accessible. Streamlining the approval processes for internal models and recalibrations is also on the agenda, potentially allowing firms to respond more flexibly to changes in their risk profile or business strategy.
The UK regulator, the Prudential Regulation Authority (PRA), is likely to take a more principles-based approach, moving away from the highly prescriptive aspects of Solvency II. This could result in more supervisory judgment and a stronger emphasis on firm-specific risk management rather than compliance with detailed quantitative rules. The PRA has indicated that it will continue to require rigorous governance, especially for insurers using internal models or complex asset structures, but with a more tailored approach.
Environmental, social, and governance (ESG) integration is another area of ongoing development. While not formally part of the original Solvency II framework, Solvency UK is expected to evolve to include more specific expectations for how insurers manage climate-related risks, both in their capital assessments and governance processes.
In conclusion, Solvency UK is likely to evolve by making capital requirements more proportionate and investment-friendly, reducing complexity for smaller firms, encouraging infrastructure and green investment through reforms to the Matching Adjustment, and strengthening supervisory flexibility and ESG risk integration. These changes reflect the UK’s broader goal of fostering a competitive and resilient insurance sector that can support long-term economic growth while protecting policyholders.