Regulation Prudential Regulation Authority features@theactuary.com
NEW DAWN Nick Ford and Rob Spiers examine what the recent introduction of the Prudential Regulation Authority means for insurers
The Prudential Regulation Authority (PRA) issued a document1 in October 2012 outlining the approach it would follow when it took over as the prudential regulator of insurance companies in April 2013. In the document the PRA stated its overall objectives as promoting financial safety and soundness, and protecting policyholders. Although these objectives are aligned with Solvency II, and the work insurers have done to meet Solvency II developments will act as a good foundation for the work needed to meet PRA objectives, there are additional areas companies will need to consider. The PRA will regulate at both a solo and group level so companies must be mindful of impacts on the Insurance Group as well. To concentrate effort on the insurers that could cause the most risk to meeting the PRA’s objectives, companies will be allocated to one of five categories. These categories consider (1) the potential disruption that an insurer could cause to the wider UK financial system; and (2) the capacity of the insurer to cause disruption to the interests of a substantial number of policyholders. The categorisation will be performed using simple criteria such as size, complexity and business type. However, it will also reflect the degree that the company is connected with the rest of the sector (eg, via derivatives or reinsurance); vulnerabilities in the financial position and deficiencies in risk management /governance; and what plans the firm has in place to return to a stable position after a stress event.
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The category assigned to a company will determine the intensity and frequency of PRA supervision and the degree of individual examination and interaction. For smaller firms, individual examination is only likely when automated tools used to analyse regulatory submissions identify outliers or adverse trends. As a result, PRA visits to smaller firms will not be on a fixed schedule. However, the PRA could still perform on-site work, with some period of notice, at any time. Although the PRA will be undertaking the categorisation of companies (and will have done so for most firms by the time this article is published), it is important for planning purposes that insurers get a feel for the likely level of scrutiny they will be under.
Risk management The PRA will expect insurers to have a strong control framework and system of governance including risk management, actuarial, finance and internal audit functions that have adequate access to the board. Insurers will need to be able to articulate their own risk appetite and this should be consistent with the PRA’s objectives of financial safety and soundness, and policyholder protection. It should also have direct links to the insurer’s strategy and business model. In order to articulate the risk appetite (and to monitor it), an insurer should consider how they identify, measure and control high impact/low frequency risks. This requires firms to have a robust risk management framework in place that is
SAM KESTEVEN
23/04/2013 08:56
