On 12th January, the PRA wrote to all life and general insurance CEOs, setting out their supervisory priorities for 2022. These should not come as a surprise to firms, with all previously covered in their business plan for the 2021/22 period released in May 2021.

The Priorities

The PRA have set out 6 key supervisory priorities for insurance companies and third country branches operating in the UK.

Financial Resilience

The major financial resilience concerns appear to arise from the changing economic and claims environment brought about as a consequence of the ongoing covid pandemic. The PRA expectation is that your board will be setting the risk appetite for the risks arising from credit downgrades and defaults. Other factors specifically noted include the risk of systemic risks where the FCA perception is that firms have not properly understood their aggregate potential exposures from issues such as silent cyber cover.

The PRA have also highlighted the need for firms to adequately model and manage the impact of the changes in pricing models as a consequence of the price walking changes now in place.

The PRA has made its Insurance Stress Tests a key priority for 2022 which will enable it to assess the resilience of the sector to systemic shocks.

Operational Risk and Resilience

The first deadline arising under the new Operational Resilience rules is 31st March 2022 and the PRA has made it clear that it will be reviewing firms programmes and implementation of change. The threat arising from cyber events is highlighted and the PRA specifically warn that it expects “all firms, regardless of size, to test their resilience against such threats.” Having the documents and framework in place, will therefore not be sufficient and while this is recognised in the original Consultation Papers and Policy Statements the PRA has highlighted it again intentionally.

Operational Resilience is a subject we have covered at some length and you can read more about it on our website here.

Lastly, firms are reminded of the new rules on Outsourcing and Third Party Risk Management and the need to maintain an updated register of their outsourcing arrangements and ensure that these services can also remain within operational resilience impact tolerances as well as review existing arrangements.

Financial Risks Arising From Climate Change

“Climate change presents a material and increasing financial risk to firms and to the financial system. Minimising the future risks from climate change requires action now and remains a key PRA priority.”

The PRA view is that many firms are falling behind in the action they expect to see as they assess and respond to these risks. The approach taken by the PRA will be informed by information gathered from the 2021 Climate Biennial Exploratory Scenario (CBES). The PRA have said they will keep a range of supervisory tools under review for use where we see insufficient progress by firms in effectively managing their climate-related financial risks. Firms should take note and ensure they are acting accordingly.

Regulatory Change

Solvency II is the major initiative here and needs no further explanation. To quote the PRA: “…we expect you to be prepared to implement changes in your approach, in particular in the areas identified as a focus here. This preparation should include identification of areas where change may result in the most material impact for your firm, and consideration of the effectiveness and capacity of your change management function.”
Firms should make sure they are ready for the changes when they come. The PRA have warned you to do so.

Third-country branches seeking authorisation in the UK

The PRA still have something like 150 Third Country Branch applications to process. It is a significant workload for the regulator. We have ourselves seen the impact of that in the way they are responding to clients who we are assisting.
Firms with outstanding applications are reminded of the need to be open and transparent in the way they work with the PRA.

We recommend early and regular interaction with the PRA as applications are prepared so as to ensure that you are responding to direction being given during the process. This assists both the firm and the PRA and can minimise last minute material issues.

Diversity & Inclusion

In July 2021, the PRA issued DP2/21 Diversity and inclusion in the financial sector – working together to drive change. Whilst this remains an issue on which consultation is sought at this stage, the PRA have flagged to firms the importance of the issue and reminded them of the benefits they see to the wider well being of financial services markets. If Diversity and Inclusion is not already on your board agenda, it should be. The PRA will be looking at what action firms are taking and there is considerable risk for firms who are not seen to be taking the issue seriously as the PRA will consider it to be potentially indicative of wider supervisory issues.

Conclusion

PRA regulated firms have been given a clear insight into the regulator’s priority issues for 2022. If these are areas that your board is not already discussing, then now is the time to do so. If you would like to discuss any of these issues in confidence, please contact Kenneth Underhill.

Kenneth Underhill, Director

Kenneth Underhill

Director
ICSR

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