By Kareline Dauger, Director, PwC
First there are some important cross-sector themes worth noting. Operational resilience is a shared priority across both the PRA and the Financial Conduct Authority, with a joint consultation paper due later this year. The PRA has reinforced its longer term pledge to get operational resilience on the same supervisory footing as financial resilience. From the FCA, firms can expect to see a bigger focus on change management and third party risks which were both significant causes of IT failures highlighted in their recent Cyber insights paper. Brexit continues to be one of the most significant changes facing the industry and therefore remains a key priority for both regulators. Firms’ culture and governance remains a priority as weak governance or poor culture has been shown to increase the likelihood that harm will occur. I continue to see use of section 166 reports around governance from both regulators and in this particular area insurers are clearly expected to significantly improve their behaviours. Finally, and looking further ahead the FCA and PRA will both have key roles in looking at the future of regulation and the financial services sector overall.
A post-Brexit world brings with it questions on equivalence and how to future-proof existing principles and rules, as well as the role of technology in improving the efficiency and effectiveness of how firms engage with the regulatory agenda. Firms should consider engaging with the regulators to help shape the future of insurance regulation in the UK.
More specific areas of focus for both life and general include:
• the evaluation of effectiveness of SM&CR and remuneration policies, review of governance arrangements on remuneration practices, diversity and corporate governance at board level. This is particularly relevant for insurers following recent focus on the London Market around diversity and inclusion.
• Publication of final policy on enhancing the approach to managing climate related financial risks following last year’s consultation.
• Continuing focus on guarding against the risk of model drift for internal model reporters.
• Running a stress test in the second half of 2019 covering the vast majority of the life and GI sectors (95% and 85% respectively) to monitor resilience to a number of scenarios.
• Consultation on a new supervisory statement on the implementation of the Prudent Person Principle.
• Issuing a final supervisory statement on good practices for insurers to identify, monitor and manage liquidity risk following consultation earlier in 2019.
• Consultation in the first half of 2019 on further refinements to the Insurance Linked Securities (ILS) regime to help increase the issuance of ILSs from UK based vehicles.
The key areas of focus in the GI sector perhaps unsurprisingly centre around firms’ business model plan optimism and their reserving and underwriting oversight for specialist business models. The PRA plans to extend its review of exposure management practices to include claims functions and consider the effectiveness of reinsurance arrangements.
In the life sector the focus continues to be on balance sheet risks arising from complex products and asset exposures. The PRA plans to issue a new consultation on outstanding issues from last year’s ERM consultation such as ongoing assessment of the Effective Value Test and how to address excessive interest rate sensitivity. The regulator will continue to review firms’ internal governance on illiquids including internal ratings. Where concerns are identified, the PRA plans to issue s166 reviews to obtain external assurance over those ratings.
There are also plans afoot to consult on further simplification to the calculation and application of the Transitional Measures on Technical Provisions (TMTP).
This is a busy agenda and insurers will need to consider how to engage in relevant areas of the debate to ensure their voices are heard and appropriately considered. The regulatory landscape is no less benign or easier to navigate than a few years back.
Careful consideration of the next set of insurance regulatory challenges and finessing your own preparations accordingly continues to be worth the time.
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