The Prudential Regulation Authority (PRA) has written to firms, outlining the PRA’s priorities for the supervision of life and general insurers in the UK this year. While these priorities relate to insurers – and not to intermediaries, which are regulated by the Financial Conduct Authority – brokers will surely benefit from knowing what their insurance partners should be working towards.
In the letter seen by Insurance Business, Bank of England’s insurance supervision executive director Charlotte Gerken and insurance supervision director Shoib Khan enumerated the following priorities: financial resilience, risk management, implementing financial reforms, reinsurance risk, operational resilience, and ease of exit for insurers.
In terms of financial resilience, Gerken and Khan wrote: “For general insurers, 2023 will likely see a continuation of pressures on claims inflation, as we mentioned in our October 2022 insights from our recent thematic review across the general insurance sector. Our review identified a number of observations relating to how claims inflation differs by line of business and geography.
“There is uncertainty in the severity and duration of claims inflation expected, and there may also be a lag before it materialises. Consequently, this gives rise to additional uncertainty around future claim settlement costs. Therefore, we expect general insurers to factor general and social inflation risk drivers into their underlying pricing, reserving, business planning, and capital modelling.”
It was also highlighted that companies should be taking proactive steps to assess the adequacy of their risk management and control frameworks, examining credit and counterparty credit risk management capabilities amid widening credit spreads, rating downgrades, and defaults.
Meanwhile part of the letter reads: “As set out in our 2022/23 business plan, we are focussed on improving ease of exit for insurers. While some work has been done in this area by the larger insurers, many smaller firms remain without any plans for exit.
“Insurers are required by Fundamental Rule 811 to prepare for resolution so that they can exit the market in an orderly fashion if required, and during 2023 we will consult on requirements for insurers to prepare exit plans (to a level of detail commensurate with the size and impact of the insurer) so that we can provide more specific expectations.”
This may be an area of concern for brokers whose clients are insured by smaller insurers.
“In the meantime,” wrote Gerken and Khan, “we expect firms to begin considering how they might exit the market if the need arose, what the obstacles might be, and how they might be overcome. These plans should be executable on a timely basis and appropriately prudent.
“In particular, firms considering transferring run-off books of business to other firms should ensure that, before disposal, they are fully cognisant of the risks contained in those books, and that those risks are fully understood by the acquiring firm.”
Aside from the abovementioned priorities, the PRA also cited other areas of focus such as non-natural catastrophe risk; financial risks arising from climate change; diversity, equity, and inclusion; and supervisory approach.
A copy of the PRA’s 2023 priority letter for insurance supervision is available online.