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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

1. The PRA Approach to Supervision for Smaller Insurers

Patrick Connolly

Manager, Retail General Insurance Team

topics
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
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 framework1
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
1.2 Firm Categorisation

Cat 5 Firms

All firms

The PRA Approach to Supervision

1 2 firm categorisation1
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 categorisation2
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
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
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 approach1
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 approach2
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
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
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

2 feedback and looking ahead

2. Feedback and Looking Ahead

Reg Clarke

Associate, Retail General Insurance Team

slide16

2.1 What we are seeing

  • Data review
  • Peer review
  • Board capability and governance
  • Firm Enquiries Function: Trends

Feedback and Looking Ahead

slide17

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

slide18

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

slide19

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

slide21

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

slide22

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

slide23

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

slide24

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

3 emerging risks for insurers
3. Emerging Risks for Insurers

Andrea French

Technical Specialist, Insurance Sector Team

3 1 definition of an emerging risks
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

3 2 key drivers of risk
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

3 3 insurance specific r isks
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

3 4 life emerging risks
3.4 Life Emerging Risks

Financial risks - Credit and counterparties

Emerging Risks

3 4 life emerging risks1
3.4 Life Emerging Risks

Financial risks - Low interest rate environment impact

Emerging Risks

3 4 gi emerging risks
3.4 GI Emerging Risks

Financial risks - Low interest rate environment impact

Emerging Risks

3 4 gi emerging risks1
3.4 GI Emerging Risks

GI line of business risk – Inadequate reserving

Emerging Risks

3 4 life and gi emerging risks
3.4 Life and GI Emerging Risks

Technology risk - Cyber attacks

Emerging Risks

4 solvency ii update
4. Solvency II update

Catherine Beech

9 October 2013

agenda
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

4 1 european policy update
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
4 2 eiopa s preparatory guidelines
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.

4 3 pra s approach to the preparatory phase
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.

4 4 what this means for smaller insurers
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.

useful resources
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/

slide47

October 2013

Changing Conduct Regulation in the UK

the financial conduct authority fca
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

fca statutory objectives
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

supervision of firms
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

supervision of firms prudential supervision
Supervision of firms – Prudential Supervision

Although primarily a conduct regulator, the FCA is the solo regulator for firms not prudentially regulated by the PRA.

the fca aims to be a judgement based forward looking and pre emptive regulator
The FCA aims to be a judgement based, forward-looking and pre-emptive regulator

The FCA’s approach emphasises 5 elements:

be forward-looking in assessment of potential problems – looking at how we can tackle issues before they start to go wrong;

intervene earlier when we see problems and before they cause consumer detriment or damage to market integrity;

tackle underlying causes of problems, not just the symptoms, as this will be more effective and efficient in the longer term for consumers and firms;

secure redress for consumers if failures do occur; and

take meaningful action (credible deterrence) against firms that fail to meet our standards, including levels of fines that have a deterrent effect.

To do this, in addition to the powers inherited from the FSA, we are able to:

Temporarily ban products or restrict sales for up to 12 months;

Stop misleading financial advertising;

Impose requirements on firms; and

Subject to consultation, tell the market earlier about enforcement action.

how will we achieve our objectives firm systematic framework key judgements
How will we achieve our objectives?Firm Systematic Framework– Key judgements

Key judgements

How the firm affects consumers, markets or competition

co ordination with the pra
Co-ordination with the PRA

The FCA and PRA operate under different sets of objectives, although there is a Memorandum of Understanding in place between the two setting minimum co-ordination standards, including:

Domestic supervisory colleges, with frequency depending on categorisation of firm;

Regular exchange of information, including material conduct risks, internal models, and capital and liquidity requirements (e.g. coverage of conduct risks in ORSA);

Notification of findings of Pillar 3 work;

Consultation on SIF applications;

Expressing independent views on Part VII transfers; and

Specific requirements for with-profits businesses.

The supervisory teams will strive to co-ordinate where possible.

focus on retail consumers
Focus on retail consumers

The FCA’s statutory objective is to secure an appropriate degree of protection for consumers.

Customers do not always behave rationally and firms can exploit consumer biases. The FCA is using Behavioural Economics (eg. randomised control trials) to better understand these and inform our supervisory approach.

We expect firms to:

Evidence how their consumers receive appropriate outcomes, throughout the product lifecycle

Implement targets that are aligned with consumers actual cover requirements

Understand the difference between customers being satisfied and customers being treated fairly

Identify, capture and mitigate the risks to their customers receiving inappropriate outcomes

enhanced focus on wholesale commercial conduct
Enhanced focus on Wholesale/Commercial Conduct

The FCA’s focus is to ensure the integrity and resilience of wholesale/commercial insurance markets, rather than seeking to introduce concepts of detriment and redress that we use in retail markets.

Firms should recognise, however, that activities in retail and commercial markets are interconnected and that risks caused by poor conduct can be transmitted and undermine both markets.

The FCA places more emphasis (and takes a more assertive and interventionist approach) in particular on three areas:

where commercial products filter down or are distributed to retail consumers;

where certain behaviours in commercial markets can cause damage to market integrity; and

where market structures can result in participants being disadvantaged or the market being inefficient.

issues products work 1
Issues & Products work (1)

Examples of current or recent thematic work affecting insurers – by sector:

slide59

Issues & Products work (2)

Current and completed reviews covering general insurance