The Prudential Regulation Authority (PRA) has published a ‘Dear CEO’ letter written by Anna Sweeney and Charlotte Gerken, co-Executive Directors for Insurance Supervision at the PRA. The letter sets out the supervisory priorities for life and general insurance firms in 2022. The letter has been sent to all insurers (including third-country branches) supervised by the PRA.

The strategy focuses on six themes:

  • Financial resilience. Both life and general insurance firms need to take into account the changing economic and claims environment, including monitoring credit risk within portfolios. Insurance company boards should have a clear understanding of exposure to credit downgrades and defaults and the ability to recover resulting losses. The letter mentions the current risk of social inflation where claims costs rise above general inflation. The PRA has observed that COVID-19 has revealed the potential for systemic risks to result in insurance sector losses. Accordingly, firms should ensure that they have properly considered the impact of aggregated exposures. Over the course of the year the Insurance Stress Test 2022 will enable the PRA and other stakeholders to assess the resilience of the sector to systemic shocks.
  • Operational risk and resilience. Operational resilience is a strategic priority for the financial sector. The PRA will continue to challenge insurers to develop a dynamic risk and control framework in order to manage the hybrid working environment and operational disruption. The letter reminds insurers to map their important business services and set impact tolerance levels for disruption to each service. The PRA reminds firms that SS2/21 requires firms to maintain an updated register of outsourcing arrangements. By Thursday 31 March 2022, firms must have identified and mapped their important business services; set impact tolerances for these; and initiated a programme of scenario testing.
  • Financial risks arising from climate change. The letter comments on firms’ progress towards meeting the expectations set out in SS3/19. It states that while some firms have made good progress towards meeting the PRA’s expectations, progress has not been consistent. Further work will be expected by the PRA over the coming months. The PRA notes the risk that some firms are focusing too much on the opportunities – and not the risks – of climate change. The approach over the coming year will be informed by the 2021 Climate Biennial Exploratory Scenario. The PRA notes that there will be a benefit in firms looking at the impact of litigation risks in the context of climate change.
  • Regulatory change. The PRA will continue to work with the Treasury on the redesign of Solvency II for the UK market. The PRA is currently reviewing the results of the Quantitative Impact Study and accompanying questionnaire. The PRA also mentions that it is continuing to explore ways to improve the approach to authorising Insurance Linked Securities as well as working on a targeted resolution regime for insurers.
  • Third-country branches. The PRA will be reviewing around 150 third-country branch applications from firms currently in the TPR over the course of 2022 and 2023.
  • Diversity and inclusion. Discussion Paper 2/21 considered how diversity and inclusion impacts the resilience of financial services firms. In the letter the PRA states that “an inclusive culture where staff can freely raise concerns and participate appropriately in decision-making can reduce the risk of ‘groupthink’, encourage debate and innovation, and support the safety and soundness of firms”.

Firms should read the letter in order to understand what the PRA will focus on over the course of the year and to help inform any prioritising of initiatives internally.

View: PRA ‘Dear CEO’ letter sets out supervisory priorities for insurance in 2022