Risk margin

On December 31, 2023, the Solvency UK reforms cut the risk margin applicable to British life insurance business, on the ground that it tied up capital without improving policyholder protection. The margin answers a simple question: if the undertaking disappeared tomorrow, how much would a third party have to be paid to take its liabilities over? The prudential regime answers with a construction, for lack of an observable price. It projects, year after year until the portfolio runs off, the regulatory capital that acquirer would have to hold, and remunerates it at a cost-of-capital rate set in the rules. Two properties follow, and they account for most of the argument. The margin grows with liability duration, hence its weight on lifetime annuities. It moves inversely to rates, so low rates mechanically inflate an amount meant to measure a stable transfer cost. The European review took a path close to London's by damping that time dependence.