The Prudential Regulation Authority (PRA), the regulatory body for financial services in the United Kingdom, has introduced a recent update concerning the ongoing reform of Solvency II. The PRA's Consultation Paper (CP19/23) is focused on the reform of the Matching Adjustment (MA), a mechanism that permits insurance companies to set aside a portion of their potential investment returns as a capital resource for their long-term insurance liabilities. The proposed reforms aim to facilitate broader and speedier investment by insurers in their MA portfolios. These changes form part of the UK's post-Brexit financial services strategy, with the aim of freeing up capital for insurers to invest in both internal and external policies, and the government is encouraging investment in regional infrastructure projects as part of the 'Levelling Up' initiative. The response from the industry has, for the most part, been positive, with industry associations and firms welcoming the potential for increased investment and the protection of policyholders.

The PRA's proposed reforms represent a significant move in the ongoing process of reforming Solvency II, a framework that has been under scrutiny and debate for some time. The Matching Adjustment (MA) mechanism is central to the insurance industry's ability to allocate capital effectively and confidently. The PRA aims to adapt MA rules to better suit the UK insurance landscape and the broader economic requirements, allowing insurers to play a more prominent role in productive investment within the UK. This aligns with the UK government's post-Brexit strategy to encourage insurers to free up capital for investment in various projects, particularly those aimed at regional development.

Industry stakeholders have generally responded positively to the proposed reforms, with the Association of British Insurers (ABI) emphasising the potential for £100 billion of investments into green and beneficial projects. Deloitte also expressed optimism about the future of investment and risk management under the new Solvency UK regime. However, it's worth noting that the expanded investment flexibility also comes with enhanced risk management requirements, affecting all firms, even those not intending to use the increased flexibility provided by the proposed reforms. The consultation period is set to close on 5th January 2024, with further developments expected in the ongoing effort to reform Solvency II and promote investment in the UK's economic growth.