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 The PRA Approach to Supervision

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

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

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

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

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

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

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

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

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

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

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