Her Majesty’s Treasury (HMT) proposals for the reforms to the risk margin’s methodology were published yesterday (here).
With the changes, the UK government envisages a risk margin that is smaller and less sensitive to interest rate movements.
The UK government aims to establish a risk margin that is smaller and less affected by fluctuations in interest rates. Under the proposed changes, the cost of capital will be reduced to 4% (currently at 6%), and a tapering factor of 0.9 with a floor of 0.25, known as lambda, will be introduced life insurers.
The risk margin changes will come into force by the end of 2023.
In addition, the proposals include adjustments to the Matching Adjustment (MA) framework, which would come into force by June 2024. Insurers will have the flexibility to include a wider range of assets in their MA portfolios, and the capital benefits will be more responsive to market risk.
Insurance Europe