On the 10th of January 2023, Charlotte Gerken (Executive Director, Insurance Supervision) and Shoib Khan Director (Insurance Supervision) published the PRA’s 2023 priorities for Insurance supervision. Risk and resilience again features prominently in their priorities for this year.
We have summarised six key priorities.
Operational Resilience
The PRA will continue to assess firms against the operational resilience rules as set out in Supervisory Statement (SS) 1/21 regarding impact tolerances for important business services.
Also, by applying the principle of proportionality, the PRA will be working closely with firms to review the appropriateness of impact tolerances, the identification of dependencies, as well as robustness of testing plans.
Insurers must make sure their important business services can remain within impact tolerances even when relying upon third-party providers.
To that end, firms should also be able to demonstrate that they meet the expectations relating to outsourcing and third-party risk management set out in SS2/21 – ‘Outsourcing and third-party risk management.’
Financial Resilience
The Bank of England’s Monetary Policy Committee forecasts a prolonged period of Consumer Price Index (CPI) inflation and that will continue to challenge the insurance sector. The PRA expects Life Insurance providers to robustly stress-test capital planning against prolonged adverse credit scenarios.
The PRA expects General Insurers to factor general and social inflation risk drivers into their underlying pricing, reserving, business planning, and capital modelling.
Risk Management
The PRA expects firms to assess their credit and counterparty credit risk management capabilities in light of widening credit spreads, rating downgrades, and defaults.
Implementing Financial Reforms
Over the course of 2023, the PRA will seek to engage with affected firms on the technical details of reforms, in advance of formal consultation. The PRA will also engage with the Life Insurance sector on the extent to which the stress testing framework may need to be adapted.
Reinsurance Risk
Insurers need to consider their Reinsurers' resilience over the whole duration of the exposures. The PRA's work on counterparty and concentration risk will examine the need for policy action on reinsurance structures and limits, to mitigate systemic risks to policyholders.
Ease of exit for insurers
Insurers are required by Fundamental Rule 8 to prepare for resolution so that they can exit the market in an orderly fashion if required. The regulator will consult on requirements for insurers to prepare exit plans so that the PRA can provide more specific expectations.
In the meantime, the PRA expects firms to begin considering how they might exit the market if needed, what the obstacles might be, and how to overcome obstacles.
You can read the full letter from the PRA here.
To enquire how our Operational Resilience and Third-Party Risk Management specialists can help your firm, enquire here or book a time with one of our consultants here now
