What happened to the £100 bn insurers promised to invest in UK infrastructure?

The House of Commons Treasury Sub-Committee grills the PRA

With Jeremy Hunt’s second autumn Budget as Chancellor coming up after the party conference break, where do we stand with respect to the policies and promises made in his first autumn Budget last November?

One of the more technical and more speculative announcements was that reforms to the UK’s post-Brexit insurance industry regulations would

“unlock tens of billions of pounds for investment across a range of sectors.”

The idea was a kind of mutual back-scratch that had apparently been arranged through a gentleman’s agreement between Government and industry in a smoky room.

The Government would ease regulatory burden on the insurance industry; the insurance industry would release investment into the economy.

How convenient, to have found — at a time when the economy was crying out for more investment, but the Government had to be “slow and steady” — that the insurance industry was ready to pump in the billions to the UK economy.

The statements from the Association of British Insurers (ABI) were even more heady.

Going beyond Hunt’s “tens of billions”, ABI director general Hannah Gurga said:

“Meaningful reform of the rules creates the potential for the industry to invest over £100bn in the next ten years in productive finance, such as UK social infrastructure and green energy supply, whilst ensuring very high levels of protection for policyholders remain in place.”

Individual firms put their shoulder to the wheel. Amanda Blanc, group chief executive of Aviva, said the reforms would enable her firm to

“invest at least £25bn over the next 10 years across the UK, including in critical areas such as social housing, schools, hospitals and green energy projects.”

What a relief for a Chancellor insistent on not expanding Government investment while staring at a crumbling national infrastructure (and that was long before anyone had heard of RAAC).

The reforms to the insurance regulatory regime, known as Solvency II, have been in the works for a long time, beginning with an April 2022 consultation, followed by the Government’s response, published in November 2022 on the same day as the aforementioned boasts from the Chancellor.

Then in June this year — as the Financial Services and Markets Act 2023 attained Royal Assent — the Prudential Regulation Authority (PRA) published a consultation including details of the proposed reforms to Solvency II.

With further consultations and responses still to come, the PRA doesn’t envisage bringing the changes promised by these reforms into play until the end of 2024, more than two years from the initial consultation.

For Harriet Baldwin, Chair of the Treasury Select Committee, who grilled Sam Woods, the PRA’s CEO, and two of his colleagues in Parliament last week, this seems too long.

Noting that the PRA had initially been wary, to say the least, of the demands from companies and the Government’s plans with these reforms, she wondered whether they were perhaps dragging their feet when it came to implementing policies that hadn’t approved of.

Sam Woods defended the work of his organisation, which, he said, had limited bandwidth and was leaving enough time for insurers to prepare for any changes to things like reporting practices.

The implementation of the reforms might still be a year away, but that was more or less easy for him to justify.

The more difficult question was: when will we see the economic impact of the promised £100 billion of special investment into UK infrastructure, green technology, etc.?

Charlotte Gerken, Executive Director, Insurance Supervision, Bank of England, explained to the Committee that she had held direct discussions with the industry about this figure and that the proposed investment would be met over a decade.

The proposed changes to the Solvency II “matching adjustment”, in particular, would enable insurers to invest more in long-term assets such as infrastructure, rather than having to hold more liquid assets such as bonds to “match” long-term liabilities, and still be eligible for the discount valuation — the “matching adjustment”.

As well as changing the types of assets eligible for the matching adjustment, the process of applying for eligibility will be made easier and penalties for breaches will be reduced. This flexibility, Gerken said, will stimulate the £100 billion of investment into “UK social infrastructure and green energy supply”.

Well, that explained the reasoning behind the £100 billion figure, but, Baldwin pressed the PRA execs, when will see the impact in the economy?

Of course, the PRA execs cannot answer that question, because it is completely out of their control. It depends on the decisions of insurers, policy holders, fund managers and whether there even are any infrastructure projects for them to move pots of money into.

As Charlotte Gerken admitted, a lot of it would depend on insurers’ risk appetite — which in the current global and national economic climate probably isn’t high — and promises they have made to annuity policyholders.

It also depends how economically attractive such investments are. Equity release mortgages remain twice as economically attractive in the “matching adjustment” benefit than infrastructure and social housing.

Moreover, Gerken noted, many firms have become so used to managing simple assets, such as bonds, that they may not have the right skills and risk management abilities to quickly shift to new assets.

However, as one industry insider pointed out to me, they could also charge much higher management fees, so that might be attractive.

Andrea Leadsom was still not satisfied, however, suggesting it was much more likely that insurance companies would just use the reforms to pay bigger dividends.

Sam Woods again insisted that that was not the PRA’s problem. It was a promise that the Government had received from industry, so it would be for the Government to hold them to it. The PRA, he snapped, was not set up as a central planning authority for investment.

The obvious fact was not mentioned: that the Government that secured this “promise” could be back on the Opposition benches by the time any of these reforms come into play by the end of next year.

While Labour have consistently backed the Government’s reforms to Solvency II, there will nonetheless be a refresh to any “promises” from industry, if they win the next election.

When Leadsom asked what was to stop insurers from investing more overseas than in the UK, Wood turned the question back on the Government again, noting somewhat ominously that the Government have

“all sorts of ways of applying pressure on firms”.

Leadsom switched the angle slightly by asking specifically about the promise from the insurance industry that they would use the reforms to invest in green infrastructure to the benefit of the Government’s “net zero” ambitions.

Charlotte Gerken responded very earnestly that she had spoken to the CEOs of large insurers and to the ABI and they were very serious about their commitment to green energy.

They have set up the Investment Delivery Forum, which is chaired by former Tory Minister and now Baroness Nicky Morgan, to help deliver on that ambition.

It will be interesting to pay attention to the work of that forum and see if it actually goes anywhere.

But, at least in this Committee hearing, Andrea Leadsom did not seem impressed.

The consultation with details of the plans to reform the matching adjustment is due to be released by the end of this month.

We will see in November whether Jeremy Hunt again relies on vague promises of massive infrastructure investment from the insurance industry to ward of any gloom that might be lingering over his second autumn Budget.