On 10th January, the PRA issued a letter to all Life and General Insurers, setting out its supervision priorities for 2023. Nothing in the list of priorities should come as a great surprise to insurance firms, and in a recent meeting with a client we noted that there was very little new on the horizon. This letter confirms our view. It is more of the same but perhaps with a little more detail. However, we strongly advise firms to use this as an opportunity to ensure that their own priorities address those issues that the PRA will be focused on in the coming year.
Whilst a footnote to the letter from Charlotte Gerken, Executive Director of Insurance Supervision, and Shoib Khan, Director, it is worth noting that everything is predicated on the caveat that “The Financial Services and Markets Bill, which is currently being considered by Parliament will – if passed into law – introduce a new secondary competitiveness and growth objective for the PRA.”
It is difficult to imagine circumstances where a government with such a significant majority as the current one has will fail to enact one of its flagship pieces of legislative change. Perhaps the PRA knows something about a forthcoming change in Government that we in the general populace do not. Unlikely though that seems, when there are changes to the PRA’s objectives we can expect further changes to its outlook.
2023 PRA Supervisory Priorities
The key priorities for the PRA in 2023 are:
Financial Resilience
The PRA is concerned to ensure that insurance firms are taking suitable account of the rapidly changing economic outlook in their approach to managing their financial resilience. Firms that were identified as outliers in the general insurer claims inflation thematic review can expect individual engagement from the PRA as it seeks to ensure they are taking appropriate action to manage their exposure. Particular concerns around general and social inflation risk drivers should be factored into underlying pricing, reserving, business planning, and capital modelling.
ICSR Key contact: Claire King
Risk Management
The PRA’s primary concern on risk management arises from the very different market and credit risk conditions that currently prevail, with firms expected to be prepared for novel risks, changes in risk correlations and increases in distressed assets which seems a little at odds with the markets at the moment but perhaps that is the point. There is significant volatility. Firms are expected to play close attention to the continued validity of the models used in their risk assessments and whether current validation remains robust in the face of multiple concurrent stresses. Life insurers will be subjected to a thematic review seeking assurance that associated risk management disciplines are keeping pace with the perceived increase in BPA growth ambitions.
ICSR Key contact: Claire King
Implementing Financial Reforms
The PRA will implement the Government’s post-Brexit reforms on Solvency II and enact a number of other aspects of the Solvency II review directly via PRA rulemaking. Firms using internal models can expect early engagement with the PRA on the implications of these reforms.
Firms in the TPR will be comforted to know that the PRA has made a commitment to complete the assessment of any outstanding branches of international firms currently within the Temporary Permissions Regime as well as setting out its proposed supervisory approach to branches. We have a number of client firms for whom this will be good news. Their applications have been outstanding without material issues for some time.
ICSR Key contacts: Claire King (Solvency) and Kenneth Underhill (Authorisations)
Reinsurance Risk
There is a sense at the PRA that rapidly growing levels of reinsurance may be creating concentrations of risk that exceed risk tolerances. Firms should consider their compliance with the Prudent Person Principle (PPP) for the risks associated with their reinsurance activities and Insurers need to consider their reinsurer’s resilience over the whole duration of the exposures. The PRA will engage with firms and other stakeholders on these issues.
ICSR Key contact: Claire King
Operational Resilience
The PRA will be reviewing the appropriateness of impact tolerances, identification of dependencies, and robustness of testing plans. Firms must ensure they are meeting their obligations as set out in Supervisory Statement (SS) 1/21 – ‘Operational resilience: Impact tolerances for important business services’ and also be able to demonstrate that they meet the expectations relating to outsourcing and third party risk management set out in SS2/21 – ‘Outsourcing and third party risk management. Recent feedback from clients tells us that the implementation of the direct connection between the two is proving complex, particularly in terms of collation and use of MI from Outsourced third parties for the purposes of monitoring OP Res Tolerances.
ICSR covered Operational Resilience in a series of webinars which can be viewed here.
ICSR Key contacts: Claire King and Kenneth Underhill
Ease Of Exit For Insurers
The PRA are concerned that many smaller firms are yet to take any action to meet their obligations under Fundamental Rule 8. If you do not have an exit plan, you should start work on this immediately. Specific guidance applies to firms considering transferring run-off books of business to other firms.
For the larger firms required to have Resolution and Recovery Plans for some time this will present less of an issue, but it is the next level down that need to address this. With a mix of resources including Risk and Run-Off we can assist.
ICSR Key contact: Kenneth Underhill
Non-natural Catastrophe Risk
There is concern that exposure management capability in relation to non-natural catastrophe risk (including cyber) remains immature in firms, with the commensurate risk this entails that firms may underestimate capital requirements. The PRA has expressed particular concern about London Market firms. The PRA will work with general insurers to enhance risk management capabilities in relation to non-natural catastrophe.
ICSR Key contact: Claire King
Financial Risks Arising From Climate Change
Firms’ ability to meet the PRA’s supervisory expectations will be assessed on an ongoing basis through supervisory engagement, firm-specific deep dives, and thematic work. The PRA refers to a number of recent publications on the subject, including feedback from the Bank of England’s Climate Biennial Exploratory Scenario (CBES) exercise. The PRA expects firms to be able to demonstrate how they are responding to expectations and the steps they are taking to address barriers to progress. There is an explicit warning that firms which are not adequately addressing risks or making insufficient progress may be subject to supervisory action.
ICSR Key contact: Claire King
Diversity, Equity & Inclusion
Following much discussion on the subject of Diversity, Equity, and Inclusion (DEI), it is clear the PRA feels insurance firms have much work to do still and 2023 will bring a formal Consultation Paper setting out proposals to introduce a new regulatory framework on DEI in the financial sector. Our expectation is that rules that currently only affect the larger listed firms will be strengthened and applied to all PRA regulated insurance firms.
ICSR Key contacts: Niki Underwood (HR) and Claire King (ESG)
Supervisory Approach
The PRA has updated its approach to categorising the ‘potential impact’ of firms, reducing the number of categories from five to four. It has also refined its risk assessment framework and core assurance work. Firms affected by these changes to the PRA’s supervisory workplan will be advised. Updates to the published supervisory approach documents are also to be expected during the first half of 2023.
ICSR Key contact: Kenneth Underhill
Conclusion
Against a backdrop of further change to the approach taken by the PRA driven by the new The Financial Services and Markets Bill, the regulator is not standing still in its work in the interim as it increases the level of existing expectations on areas it has focused on in the past few years. What we are seeing is a continued focus on the effectiveness with which regulated firms have acted upon existing supervisory requirements, alongside a renewed focus on areas where there is pressure to do more – climate change and diversity, equity and inclusion are both singled out for greater controls.
Please do speak with the relevant members of the ICSR Senior Team if you have any questions about specific areas and how they may affect your firm.
