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1. The PRA Approach to Supervision for Smaller Insurers

1. The PRA Approach to Supervision for Smaller Insurers. Patrick Connolly Manager, Retail General Insurance Team . Topics:. 1.1 The Regulatory Framework 1.2 Firm Categorisation 1.3 The Supervisory Approach 1.4 Regulatory Co-ordination 1.5 Communication. 1.1 The Regulatory Framework.

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1. The PRA Approach to Supervision for Smaller Insurers

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  1. 1. The PRA Approach to Supervision for Smaller Insurers Patrick Connolly Manager, Retail General Insurance Team

  2. Topics: 1.1 The Regulatory Framework 1.2 Firm Categorisation 1.3 The Supervisory Approach 1.4 Regulatory Co-ordination 1.5 Communication The PRA Approach to Supervision

  3. 1.1 The Regulatory Framework Source: Bank of England Quarterly Bulletin, Q4 2012 Key: FPC Financial Policy Committee FCA Financial Conduct Authority The PRA Approach to Supervision

  4. 1.1 The Regulatory Framework The PRA’s statutory objectives:- • General objective: “promoting the safety and soundness of PRA-authorised firms” • Insurance objective: “contributing to the securing of an appropriate degree of protection for those who are or may become policyholders” The PRA Approach to Supervision

  5. 1.2 Firm Categorisation Cat 5 Firms All firms The PRA Approach to Supervision

  6. 1.2 Firm Categorisation Category 4 Insurers whose size …….. “very little capacity individually to cause disruption to the UK financial system. ……………”. Category 5 Insurers whose size,interconnectedness, complexity and business type give them almost no capacity individually to cause disruption to the UK financial system by failing or by carrying on their business in an unsafe manner, but where difficulties across a whole sector or subsector may have the potential to generate some disruption. They have no capacity to cause disruption to the interests of a substantial number of policyholders. The PRA Approach to Supervision

  7. 1.2 Firm Categorisation Supervisory Models • Category 4 firms: • Annual supervisory assessment visit • Desk-based reviews of returns and Management Information • Issue-driven meetings and reactive work • Peer group and trend analysis • Category 5 firms: • Firm Enquiries Function for routine queries • Broadly reactive supervision in response to crystallised risks • Some proactive analysis and assessment at solo and peer-group level The PRA Approach to Supervision

  8. 1.2 The Supervisory Approach Firm Enquiries Function Supervision Team Authorisations Changes in Control Approved persons (red channel) Part VII transfers Capital issues Strategic issues FCA interaction • Queries relating to: • Returns • Authorisation process • The Handbook • First reporting of crystallised risks The PRA Approach to Supervision

  9. 1.3 The Supervisory Approach “Forward-looking and judgement-based supervision…” What does this mean in practice? The PRA Approach to Supervision

  10. 1.3 The Supervisory Approach PSM = Periodic Summary Meeting, sets our supervisory strategy Cat 5 Cycle The PRA Approach to Supervision

  11. 1.3 The Supervisory Approach Threshold Conditions • Minimum requirements that firms must meet at all times in order to be permitted to carry out regulated activities • Firms will need to meet both PRA-specific and FCA-specific threshold conditions • PRA-specific threshold conditions: • Legal status • Location of offices • Prudent conduct • Suitability • Effective supervision • The PRA will assess firms against the threshold conditions on a continuous basis The PRA Approach to Supervision

  12. 1.4 Regulatory Co-ordination • Effective delivery of our approach requires co-ordination with the FCA • Focussed at firm level • MoU and colleges to ensure statutory duty to co-ordinate is effective • Firm-specific supervision alone is not sufficient to deliver financial stability. Must be complemented by an effective macroprudential regime • Two-way flow of information and exchange of views between the PRA and the FPC • PRA responsible for implementing relevant FPC recommendations on a ‘comply or explain’ basis • FPC has powers to direct the PRA The PRA Approach to Supervision

  13. 1.5 Communication Our main objectives are to: • Communicate the PRA objectives and expectations to industry clearly. • Understand market trends in order to inform our forward-looking approach and communicate supervisory priorities for the sector. • Raise awareness of the information and support available to smaller insurers. The PRA Approach to Supervision

  14. 2. Feedback and Looking Ahead Reg Clarke Associate, Retail General Insurance Team

  15. 2.1 What we are seeing • Data review • Peer review • Board capability and governance • Firm Enquiries Function: Trends Feedback and Looking Ahead

  16. Key Performance Indicators: 2012 • Total funds up 17% • Gross Written Premiums up 15% • Capital levels increased • BUT at individual firm level experiences rather mixed Feedback and Looking Ahead

  17. Capital data supports PRA supervisory approach • Better use of data to help identify outliers and trends • Enhances our supervision of firms (more proactive) • Capital levels increasing steadily • Fewer than 10% of firms have Pillar 1 ratios below 150% of their capital resource requirement Feedback and Looking Ahead

  18. 2.1 What we are seeing: Data review (annual returns) • Reporting quality generally good but • Review of ECR (Enhanced Capital Requirement) forms reveal misreporting of individual capital guidance • Firms need to understand the ICG they have been set • Firms ICG cannot be lower than MCR • Misreporting of base capital resource requirement by some firms • Impacted by Euro : Sterling exchange rate • Applies from 31 December Feedback and Looking Ahead

  19. Feedback and Looking Ahead

  20. Annual periodic summary meeting for peer groups of firms • Key objectives of review is to focus on identifying and feeding back trends and issues to the firms within that peer group • Challenging exercise given niche markets of some firms • PRA in early stages of review. Expect to cover our specified groupings over 18 month timeframe (by Q2 2015) Feedback and Looking Ahead

  21. First point of contact, liaising closely with key areas of the PRA and Bank. • Dedicated team of five, wide range of regulatory experience. • Webpage available to provide information on the issues you contact us about or are relevant to you, including reporting and authorisations. Feedback and Looking Ahead

  22. Significant PRA resource spent in dealing with the issue of Board capability and governance. • PRA expects firms to have regular Board review and assess: • Does the board have a good mix and balance of skills, experience, independence and knowledge to enable them to discharge their responsibilities effectively? • Is the Board satisfied that the business is run prudently? • Have clear structures of accountability and delegation been established? • Does the Board provide appropriate direction and challenge to the management team? NB: • These expectations apply to all firms, regardless of size • The things we would expect of a Board are referenced in the our Principles and in UK Corporate Governance Code Feedback and Looking Ahead

  23. Intend to seek forward looking quarterly capital data • PRA assessing the potential for a ‘programme’ of ICA reviews for Category 5 firms • Electronic Reporting [Deadline for comments on OCP 8/13 is 1 November 2013] • PRA intend to develop a proportionate NDF regime once SII position is clearer Feedback and Looking Ahead

  24. 3. Emerging Risks for Insurers Andrea French Technical Specialist, Insurance Sector Team

  25. 3.1 Definition of an emerging risks An emerging risk can be defined as: "an issue that is perceived to be potentially significant but which may not be fully understood or allowed for in insurance terms and conditions, pricing, reserving or capital setting". (Source: Lloyd’s of London) Emerging Risks

  26. 3.2 Key drivers of risk The key drivers of risk include: Economic, technological, environmental and socio-political developments as well as the interdependencies between them. Other risk drivers can include: The changing business environment, such as liability issues, evolving regulatory regimes, stakeholder expectations, and shifts in risk perception. Emerging Risks

  27. 3.3 Insurance-specific risks This presentation will concentrate on the insurable areas of risk for both life and general insurers. These risks include: Life Products Risk (credit & counterparties, impact of the low interest rate environment, enhanced annuities and retail distribution review & platforms) General Insurance (GI) Risk (impact of the low interest rate environment, inadequate reserving, UK flooding and periodic payment orders) Technology Risk (cyber attacks) Stakeholder Risk (shadow banking activities) Black Swan Risks (combined effect of financial, catastrophe & pandemic) Emerging Risks

  28. 3.4 Life Emerging Risks Financial risks - Credit and counterparties Emerging Risks

  29. 3.4 Life Emerging Risks Financial risks - Low interest rate environment impact Emerging Risks

  30. Product Risks – Enhanced annuities 3.4 Life Emerging Risks Emerging Risks

  31. Product risk – Platforms and Retail Distribution Review 3.4 Life Emerging Risks Emerging Risks

  32. 3.4 GI Emerging Risks Financial risks - Low interest rate environment impact Emerging Risks

  33. 3.4 GI Emerging Risks GI line of business risk – Inadequate reserving Emerging Risks

  34. GI line of business risk - UK flooding 3.4 GI Emerging Risks Emerging Risks

  35. GI line of business risk - Periodic Payment Orders (PPOs) 3.4 GI Emerging Risks Emerging Risks

  36. 3.4 Life and GI Emerging Risks Technology risk - Cyber attacks Emerging Risks

  37. Stakeholder risk - Shadow banking activities 3.4 Life and GI Emerging Risks Emerging Risks

  38. Black Swan - Combined effect of a financial, catastrophe & pandemic events 3.4 Life and GI Emerging Risks Emerging Risks

  39. 4. Solvency II update Catherine Beech 9 October 2013

  40. Agenda 4.1 European policy update 4.2 EIOPA’s preparatory guidelines 4.3 PRA’s approach to the preparatory phase 4.4 What this means for smaller insurers

  41. 4.1 European policy update • Implementation date • The PRA planning horizon remains 1 January 2016 • Solvency II (amended by Omnibus II Directive) • Amends the Level 1 text • Level 2 and Level 3 text • Will follow the publication of the Level 1 text • These texts contain more detailed implementing measures and guidance

  42. 4.2 EIOPA’s preparatory guidelines These are aimed at supporting regulators and firms in preparing for Solvency II. They cover four main areas which EIOPA considers fundamental for effective implementation. The four areas are: • Systems of Governance; • Forward looking assessment of the undertaking’s own risks (based on the ORSA principles); • Reporting; and • Pre-application for internal models. A link to EIOPA’s final guidelines, feedback statements and annexes was made available on the PRA website on 27 September 2013.

  43. 4.3 PRA’s approach to the preparatory phase PRA approach to considering the preparatory guidelines This is not early implementation of Solvency II. The PRA supports EIOPA’s proportionate and pragmatic approach in preparation for the implementation of Solvency II. The PRA will apply the guidelines to firms in a proportionate and risk-based manner, consistent with the PRA’s overall approach to insurance supervision. The PRA expects firms to make the necessary preparations to be compliant with the relevant requirements for the Solvency II regime at implementation. PRA approach to setting expectations of the UK insurance industry We aim to publish a draft PRA Supervisory Statement for consultation in October. This will set out the PRA’s expectation of firms. We will issue a final Supervisory Statement in December, and support this with industry communications, including briefing sessions for firms.

  44. 4.4 What this means for smaller insurers Smaller insurers should continue to: ensure that they meet the current regulatory requirements; and submit six monthly Solvency 2 progress statements when requested. We encourage firms to: keep abreast of developments in Solvency II – the PRA will post news at www.bankofengland.co.uk/Solvency2, and firms should also refer to the websites of European policy institutions, e.g. EIOPA, European Commission and Parliament; be familiar with EIOPA’s preparatory guidelines that apply to them; refer to the PRA’s Supervisory Statement to understand the expectations of firms; and make the necessary preparations towards full compliance of Solvency II at implementation.

  45. Useful resources Firm Enquiries Function • Email:PRA.FirmEnquiries@bankofengland.co.uk​Phone: +44 (0)20 3461 7000Please have your six digit firm reference number (FRN xxxxxx) ready. • Post: Firm Enquiries Team (MG1-SE)Prudential Regulation Authority20 MoorgateLondon, EC2R 6DA Websites • Smaller Insurers Webpages http://www.bankofengland.co.uk/pra/Pages/supervision/smallinsurers/default.aspx • Solvency II webpages on Bank of England website www.bankofengland.co.uk/Solvency2 • European Commission website http://ec.europa.eu/internal_market/insurance/solvency/index_en.htm • EIOPA website https://eiopa.europa.eu/

  46. October 2013 Changing Conduct Regulation in the UK

  47. The Financial Conduct Authority (FCA) Strategic objective ensuring the relevant markets function well Operational objectives promoting effective competition in the interests of consumers; securing an appropriate degree of protection for consumers; and protecting and enhancing the integrity of the UK financial system. New regulatory system

  48. FCA Statutory Objectives Securing an appropriate degree of protection for consumers Promoting effective competition in the interests of consumers: the needs of different consumers the ease with which consumers can change providers the ease of new entry how far competition is encouraging innovation Protecting and enhancing the integrity of the UK financial system (including): soundness, stability and resilience orderly operation of markets financial crime market abuse transparency of price formation

  49. Supervision of firms Aim of Supervision To ensure firms have the interests of their customers and the integrity of the market at the heart of how they run their business. How will we do this? By influencing, persuading and, where appropriate, using formal powers to achieve a significant transformation in firms’ conduct behaviours. For what population of firms? The FCA is responsible for the retail and wholesale conduct supervision of c.25,000 firms The FCA is also responsible for the prudential supervision of c.23,000 firms (i.e. those that are not prudentially regulated by the PRA). Custodian Banks Insurance Intermediaries Fund Managers Mortgage Intermediaries Credit Unions Mortgage Lenders Retail Banks Financial Advisors Building Societies Platforms and SIPPs Life Insurers Wealth Managers London Markets Wholesale Firms Retail GI

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