Europe faces a major funding gap, with high infrastructure investment needs and constrained public finances. As part of the Capital Markets Union action plan, the European Commission aims to ensure prudential regulation does not unnecessarily restrict investment by banks and insurers. Life insurers, with their long-dated liabilities and significant investment capacity, are well placed to support productive long-term investment under the right capital framework. The long-term guarantee (LTG) measures under Solvency II are designed to support long-term investment, particularly for retirement and other long-duration products. By reducing the impact of short-term market volatility on insurers’ balance sheets, the measures help limit pressure for premature asset sales and support continued investment in long-dated, illiquid assets.
The LTG toolkit includes five mechanisms, with the matching adjustment (MA) as a central element. In practice, the MA allows insurers to discount eligible liabilities using a rate derived from matched fixed-income assets, less expected credit risk through the fundamental spread. Its use is subject to detailed Solvency II and Solvency UK requirements, including supervisory approval and ongoing asset-liability matching. In this paper, we discuss:
- MA adoption across Europe: Differences between Spain and the United Kingdom (UK).
- Initial MA application in the UK: The need for insurers to engage early with stakeholders.
- MA as an evolving framework in the UK: How firms need to be ready to expand their approach, with continuous development and sophistication.