June 6, 2018 / 3:16 PM / 14 days ago

Bank of England blames Brexit for not changing EU insurance rule

LONDON, June 6 (Reuters) - The Bank of England (BoE) has rejected calls from British lawmakers and insurers to ease a European Union insurance capital requirement rule, blaming Brexit uncertainty.

BoE Deputy Governor Sam Woods has studied possible changes to how the "risk margin" is calculated in EU rules known as Solvency II. It refers to what a third party would need to take over an insurer's policies if it went bust.

Lawmakers on parliament's Treasury Select Committee said last October the rule should be changed because it was forcing insurers in Britain to reinsure business offshore to benefit from lower capital charges.

The BoE has failed to persuade the EU to make speedy changes to the rule, leaving it with an option of unilateral action that Woods ruled out on Wednesday, citing Brexit.

Woods considered ways to mitigate the impact of the risk margin and how it was calculated.

"However, in the context of the ongoing uncertainty about our future relationship with the EU in relation to financial services we do not yet see a durable way to implement a change with sufficient certainty for firms to be able to rely on it for pricing, capital planning and use of reinsurance," he said in a letter to the Treasury Committee.

"We will keep this position under review and will update the committee as soon as we can see a clear way forward."

British insurers called on the BoE in March to ease the rule which they say costs them 50 billion pounds ($67 billion) in extra capital charges.

Huw Evans, director general of the Association of British Insurers, said on Wednesday he was very disappointed.

"While it is a step forward for them to confirm a technical solution to the problem exists within the current Solvency II framework, that only makes it more frustrating to hear that uncertainty about Brexit has prevented the regulator acting in a way that makes sense for UK plc," Evans said.

Woods said the build-up of the stock of offshore reinsurance was an unintended consequence of the risk margin rule and, if left unconstrained, would become a significant prudential concern.

"Our supervisory reviews of firms' reinsurance activities have not, however, brought to light significant immediate concerns about the way in which that reinsurance is being conducted," he said.

There does not appear to be any harmful effects on policyholders via annuity prices either, he added.

$1 = 0.7450 pounds Additional reporting by Carolyn Cohn; Editing by Mark Potter

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