The Prudential Regulation Authority (PRA) has published a letter from Chris Moulder (Director of General Insurance, Bank of England) to the CEOs of general insurance firms. The letter follows a speech made earlier in the week by Mr Moulder on the same issues. The letter considers the implications of the current soft market for general insurers and sets out expectation in terms of underwriting, reserving, reinsurance and the assessment of capital requirements in the current environment.
Key points include:
- Underwriting. The PRA will begin to prioritise work on underwriting and pricing governance and will look for strong governance around expansion into new products/markets, as well as transparency around the ability to manage and monitor aggregate exposure. Underwriting controls are the first line of defence in identifying the extent and potential impact of the soft market. The PRA will expect board engagement on: the extent to which the board receives adequate information on pricing trends; the effective management of the conflict between business plan objectives of growth, profitability and adequate pricing; the ability to monitor and report on exposure accumulations with sufficient granularity to reflect the materiality of the risk; and the robustness of the governance of new products.
- Reserving. The PRA expects firms to: demonstrate strong governance around the reserve-setting process; have regard to underwriting, reserving and economic cycles when setting reserves; and ensure that there are clear feedback loops between underwriting, claims and reserving. Larger firms can expect the PRA to continue to follow a cycle of external assurance reviews of reserves.
- Reinsurance. Supervisors will want assurance that boards understand risk transfer and ensure that the economic impact is adequately reflected in business planning, capital setting and reserving and to appreciate the wider risks to which reinsurance placements can give rise. The PRA is aware that more complex reinsurance arrangements are re-emerging and expect appropriate treatment with respect to preparing regulatory statements and capital requirements.
- Capital. As the market for certain lines of business continues to deteriorate, the PRA will expect boards to consider whether the assessment of risk in these lines continues to be valid. Soft market conditions reduce the level of premium as a percentage of exposure. The PRA expects that as premium rates reduce, the level of capital relative to exposure should increase. Boards are expected to understand and challenge the extent to which these factors contribute to changes in their firm’s assessment of capital requirements.