FSA and BoE publish PRA approach to insurance supervision

Nia Williams

June 20, 2011

The BoE and FSA have said they recognised the risks posed by insurers are different from the other firms the PRA will supervise. The future authority will have a specific insurance objective and a distinct approach to supervising insurers.

The paper outlines the scope and principles underlying the PRA’s approach; the scope of the PRA; the PRA’s risk assessment framework; the PRA’s forward looking, judgement-based approach to supervision; the approach to policy-making that will support the judgement-led model; and the approach to authorising firms and approving individuals.

The PRA will be responsible for the prudential supervision of over 2,000 firms, of which around half will be insurers, with the remainder deposit-takers and certain investment firms. The PRA will supervise companies specialising in life insurance, general insurance and wholesale insurance including reinsurance, and companies that undertake a composite of those activities.

On current data, it will regulate 636 general insurers, around 300 of which operate in the UK under a passport from other European Economic Area countries, 123 life insurers of which 70 will be EEA authorised, 133 friendly societies and 132 insurers which are involved in the London Market.

Hector Sants, chief executive of the FSA and chief executive designate of the PRA, said: “The PRA will be a focused prudential regulator for insurers. In setting out the PRA’s approach to insurance supervision, we have looked closely at the lessons arising from previous episodes of insurance company distress.

“Reflecting the uncertain nature of insurers’ liabilities, prudential insurance regulation will be forward-looking and judgement-based. Much of the PRA’s proposed approach will be achieved in practice through the application of Solvency II, the new European framework for insurance supervision.”

Juliam Adams, director of insurance at the FSA, added: “We recognise that the nature of insurers’ business models exposes them to a different set of risks than banks. The PRA’s regulation of insurers will seek to promote the safety and soundness of insurers to deliver two aims: to secure appropriate protection of policyholders and to contribute to the stability of the system.

“The PRA will concentrate its resources and actions on those insurance firms and issues that pose the greatest risk to its objectives. The risk assessment framework for insurers will explicitly take into account the need to protect policyholders, the various risks to which insurers are exposed and the different way in which insurers can fail.”

Andrew Bailey, director of UK banks and building societies at the FSA and deputy chief executive designate of the PRA, said: “Insurance companies can in some circumstances pose risk to the stability of the financial system via a range of channels, including as providers of funds to banks. The insurance supervisors will work closely with the Financial Policy Committee, who will assess system-wide risks.”

David Gulland, managing director of the RGA, added: “Solvency II is far more complicated when compared to our current regime. It’s far more detailed and will be onerous for some lines of business. However the regulatory reforms are inevitable and thankfully today’s news does have an upside.

“It’s good to see the FSA and BoE not painting insurers with the same brush stroke as they do other financial institutions. After all the financial crisis was actually a banking crisis, Northern Rock, Lloyds and Royal Bank of Scotland are all banks and not insurers.

“The risks banks pose to the economy aren’t the same ones that have existed in the insurance sector. Conversely, insurers are exposed to different risks which don’t affect banks.”

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