Report: Post-Brexit insurance regulation reform would unlock billions for UK’s green economy

Pictured: The Walney Extension offshore wind farm

Published this week by the Pension Insurance Corporation (PIC), which holds more than £47bn in investments, the report outlines how the UK’s past and ongoing subscription to the EU’s Solvency II framework for insurance companies has hampered investment in low-carbon assets.

The main argument of the report, entitled ‘Investment Unleashed’, is that existing flaws in the regulation means that life insurance firms feel encouraged to invest in primarily large, well-funded companies. This has skewed investments towards mature technologies and sectors, the report argues, rather than sectors that need support to grow to create the future economy and deliver ambitions on climate, nature and levelling up.

PIC states that it has invested £10.9bn in productive finance since 2016 and defines productive finance as “investment that expands productive capacity, furthers sustainable growth and can make an important contribution to the real economy”. It estimates that it would have made an additional £10bn of investment in this period without Solvency II requirements.

In terms of low-carbon assets specifically, the report claims that PIC would be able to invest an additional £500m each year going forward into renewable energy development and other decarbonisation-related projects if the regulatory reforms recommended are passed. It stipulates that many other firms in its sector would be able to make similar changes, unlocking billions of pounds for sectors including not only renewables but energy efficiency, low-carbon heat, low-carbon transport and social housing.

The report states: “The Government’s levelling up and net-zero ambitions require significant investment if they are to be achieved. Quite simply, the Government itself cannot provide this funding.”

PIC is calling for the reform of Solvency II to fix issues with two of the framework’s key mechanisms that it claims have had the unintended consequence of “keeping capital tied up in managing ‘artificial’ problems on balance sheets” and disincentivising investments in emerging sectors. The mechanisms are the Risk Margin and Matching Adjustment; the former calculates the level of reserves life insurance companies must hold and the latter protects against price volatility, incentivising investors to support secure long-term assets.

PIC’s chief executive Tracy Blackwell summarised: “We have a once in a lifetime opportunity to channel new investment into communities across the UK, building quality homes, decarbonising our economy, creating jobs and levelling up.”

Other organisations calling for net-zero to be properly factored in to the UK’s Solvency II reform include the Association for Renewable Energy and Clean Technology (REA) and the Association of British Insurers (ABI).

The ABI’s outgoing director-general Huw Evans recently wrote: “Are we serious about funding net-zero? If so, not to use the immense investment power of the UK’s world-leading long-term savings and insurance sector would be a massive mistake. At the moment it is easier to invest in a mining company than a wind farm. A fundamental test for Solvency II reform is whether this changes.”

The Climate Change Committee (CCC) is forecasting that the UK’s net-zero transition, if well-managed, can be delivered with net costs of 0.5-1% of GDP.

Sarah George