Clifford Chance

In June 2023, the PRA published its latest consultation on the Solvency II review. This is the first of a set of consultation papers that aim to establish a new regulatory framework for the UK insurance industry, called Solvency UK. The consultation paper includes a new proposed "mobilisation" regime, which seeks to enhance competition and foster innovation within the UK. This is to be achieved by granting greater flexibility to newly authorised insurance companies as they conduct their operations. Additionally, the regime intends to raise the thresholds at which Solvency UK becomes applicable.

This article examines the proposed mobilisation regime and looks at the possible benefits for the insurtech sector. Insurtech companies use technology to provide insurance products and services in a more efficient and customer-centric way. The mobilisation regime could help insurtech companies to enter the market more easily and to innovate more quickly.

For more details regarding the Solvency UK proposals, please consult our briefing titled "The PRA Publishes Solvency UK Consultation Paper - August 10, 2023."

What is prompting the need for change?

The feedback from respondents to the Solvency II Call for Evidence issued in July 2021, which initially introduced the proposed mobilisation regime for Solvency II, was unanimous in highlighting existing barriers for new entrants to the market. Specifically, respondents recognised the complexity and financial burden of compliance as significant obstacles. They also identified challenges related to raising the requisite capital before obtaining authorisation, the protracted authorisation procedure, and the absence of clear guidelines for start-up business models.

Some respondents acknowledged that barriers to entry are essential within the regulatory structure to safeguard policyholders. However, they contended that the present regulatory framework is overly cumbersome, discouraging potential new players. This, in turn, could have negative repercussions for policyholders by stifling competition and limiting choices within the market.

The changing landscape highlights the essential role that the UK's start-up sector plays in shaping insurance technology and innovation. However, these insurtech firms often face hurdles in expanding due to the existing regulatory landscape in the UK. This frequently confines them to roles as intermediaries, service providers, or collaborators with larger firms. It is not unusual for these entities to choose regulatory jurisdictions outside of the UK. Interestingly, there are currently no UK-based insurtech companies functioning as PRA-authorised insurers. Notable examples, such as Zego and Marshmallow, have instead opted to operate under the jurisdiction of the Gibraltar Financial Services Commission (GFSC). Recognizing these dynamics, the PRA is proactively addressing this issue to cultivate a more favourable environment for the growth of such businesses within the UK.

Who will benefit?

The mobilisation regime is targeted at small start-up insurers with simple business models focused on short-term insurance products. These proposals could benefit firms that are considering applying for authorisation as an insurer in the UK.

The MGA model, which stands for "Managing General Agent" or "Managing General Agency," is a common approach for insurtech businesses that use specialised insurance agents or brokers to underwrite with delegated authority. The mobilisation regime could allow insurtechs to move away from this model and obtain authorisation to control the entire insurance value chain themselves, without being constrained by partnering with insurers that currently provide underwriting capacity.

However, the potential value of the regime may be limited to small start-up insurers with simple business models. Life insurers and insurers that are part of a well-established insurance group and/or have sufficient resources are unlikely to benefit from this reform.

What the mobilisation regime does

The New Insurer Start-Up Unit established by the PRA and FCA has been in existence for some time now. However, the PRA recognises that there is a circular issue faced by new insurers in trying to build out their business (e.g., attracting investment and recruiting staff) when they are not yet authorised and the need for such business operations to be in place in order to be authorised.

The mobilisation regime is designed to address this issue by allowing new insurers to begin trading while they are still in the process of being authorised. This would give them the certainty of being authorised as they complete the final stages of their set-up, and it would allow them to secure further investment, recruit new staff, and strengthen operational capabilities.

During the "mobilisation period," new insurers would be subject to adjusted entry requirements, such as a lower capital floor, lower expectations for key personnel and governance structures, and exemptions from some reporting requirements. This would make it easier for them to get started and focus on building their businesses. The Government also proposes to increase the thresholds for the size and complexity of insurers before Solvency UK applies to £15 million in annual gross written premiums (triple the previous threshold) and to £50 million in gross technical provisions (double the previous threshold). This would benefit small insurers that may be close to the current threshold, either now or in the future.

Application process

Potential new insurers would need to make an application for mobilisation along with a mobilisation plan that illustrates how the firm could exit the market in an orderly and timely way if it failed to meet its targets.

The PRA (and FCA) would consider each application on a case-by-case basis. If the application is successful, the new insurer would be authorised and then enter an optional 12-month mobilisation period. During this period, the insurer would have a £1 million minimum capital requirement (MCR) floor but would operate with business restrictions to limit risks to policyholders.

Firms would be limited during this mobilisation phase to effecting contracts of insurance with a net exposure below £50,000, short-term contracts with a maximum policy term of 2 years and on a claims-made basis, and no liability insurance.

To exit mobilisation, insurers would need to apply to the PRA for a Variation of Permission, showing that going forward the insurer can meet applicable regulatory requirements, including capital requirements. There remains, therefore, some uncertainty around whether a new insurer will "graduate" from mobilisation, and firms will want clarity around this as part of the consultation feedback.

Looking forward

The mobilisation regime should make it easier for potential start-up firms to raise the capital they need for authorisation and market entry. Insurtech businesses often specialise in a specific product area, entering niche markets (e.g., drone insurance from Flock) or creating novel approaches in existing markets (e.g., pay-per-use pricing from Zego). Therefore, supporting firms that launch new products will be a key benefit to consumers. A similar regime has been in place for new banks since 2013, which led to a significant increase in new entrants to the market (9 banks were set up in the UK in the financial year 2019-20).

The PRA is expected to issue a consultation in September this year focusing on the more quantitative elements of Solvency II reform. Most Solvency UK reforms, including the mobilisation regime, are to be implemented by the end of 2024.

Please reach out to us if you have any questions about the mobilisation regime and how it might affect your firm.