Honey, I shrunk the Brexit dividend

They’re slippery these Brexit dividends. Take your eyes off them and, whoosh, off they go: both disappearing or materialising not likely as promised.

Final yr’s commerce settlement with Australia was “tailor-made to the UK economic system”, we have been informed, a “historic” deal that will “create new alternatives for companies”. 

Maybe this meant traditionally unhealthy: George Eustice, setting secretary on the time of the deal, mentioned this week that it “gave away far an excessive amount of for a lot too little in return”.

We have now the liberty to set our personal guidelines, although. That’s essential. And but the truth of including value and paperwork into worldwide industrial provide chains has prompted one other delay to the introduction of a post-Brexit UKCA high quality assurance mark, a plan that enterprise teams have lengthy maintained is impractical.

We’ll all the time have insurance coverage. The totemic matter of how you can overhaul Solvency II guidelines rumbles on, presenting one of many extra concrete post-Brexit alternatives. The promise was that enhancing insurance coverage regulation may liberate cash to be invested into the UK economic system and present that rulemaking flexibility is a win for the Metropolis of London.

It hasn’t been that straightforward. This nerdy subject has change into a tug of conflict over, basically, who units the tone and the tempo in crafting our post-Brexit monetary strategy.

The trade final yr floated the politically-appealing notion of £95bn in capital that could possibly be freed as much as be reinvested in infrastructure, housing or clear power, in keeping with work finished by KPMG for the Affiliation of British Insurers. The Prudential Regulation Authority, accused this week of being a “constant impediment to reform” by former enterprise secretary Jacob Rees-Mogg, had different concepts.

In equity, everybody has all the time agreed that the danger margin in Solvency II, a capital buffer, is simply too risky and lately has been too giant. The wrangling has been over the matching adjustment, which permits writers of long-term enterprise resembling annuities to match predictable money flows from belongings in opposition to liabilities, and get a capital profit because of this.

Extra belongings are prone to be eligible for this remedy, because the sector desires. However the PRA has considerations over the calculation of the credit score dangers taken by insurers of their investments. It desires a more durable strategy.

Regardless of current accusations of regulatory foot dragging, everyone seems to be ready for the Treasury to set the course for what occurs subsequent. The federal government in February promised a “materials capital launch”, with “tens of billions of kilos” for long-term productive investments. The trade’s concern has been that reform may give with one hand (threat margin), and take away on the opposite (matching adjustment). 

The world has modified since then, regardless. The danger margin had been extreme due to all-time low rates of interest. Rising gilt yields this yr have eaten into the capital launch that could possibly be attributed to any reform.

In response to one firm’s estimates, the mixture threat margin held by the life insurance coverage sector might have roughly halved between the top of 2021 and the third quarter of this yr. Provided that the federal government floated a minimize of round 60 to 70 per cent in February, that means the majority of the capital launch might have successfully occurred early due to market strikes.

There’s nonetheless benefit in reform: the prize is a better-designed threat margin that’s much less delicate to rates of interest. Funds will be invested in helpful methods, whatever the mechanism of launch. Improved pension scheme funding will imply extra insurance coverage buyouts, boosting sector belongings. By way of the funding kilos the economic system wants, that is all good.

However discovering an enormous quantity to crow about is tougher when a bit of the profit out of your post-Brexit reform has already occurred anyway. Regulators can also see the diminished threat margin as laying naked the perceived weak point within the matching adjustment calculation, strengthening their resolve. The insurance coverage sector, at this stage, most likely simply desires to get on with it.

The 2 predominant elements of Solvency II reform — threat margin and matching adjustment — are separate points that shouldn’t be linked in political-regulatory horse-trading. Nor ought to insurance coverage regulation be backing right into a determine that these seeking a post-Brexit dividend can placed on a bumper sticker.

The nice Solvency II dividend has shrunk. Time to get on with higher regulation for its personal sake — because it all the time ought to have been.

helen.thomas@ft.com
@helentbiz