The Prudential Regulation Authority (PRA) has published a letter send by Anna Sweeney and Charlotte Gerken, joint executive directors of insurance, on its supervisory priorities for the insurance sector in 2021. The priorities identified are financial resilience, LIBOR transition, operational resilience, financial risks arising from climate change and changes in PRA responsibilities after the end of the UK withdrawal transition period.
Briefly, in relation to the priorities the following points are made:
- Financial resilience. In light of the illiquid nature of the insurance sector’s credit exposure, the PRA will expect boards to satisfy themselves that their firms are resilient to a wide range of potential adverse credit scenarios in both the short and medium term. This assessment of reliance should include both the firm’s capital position and the risk management of illiquid exposures. Firms will be expected to continue to apply stress and scenario testing to support board decision-making. Another comprehensive stress test will be run in 2022. Boards are reminded about the PRA’s expectations in respect of distributions (see Supervisory Statement 4/18) and must be able to satisfy themselves that each distribution is prudent. In 2021 the PRA plans to develop its approach to recovery and resolution planning.
- LIBOR transition. The PRA reminds firms that there is limited time within which to move to alternative risk-free rates. Progress towards replacements for LIBOR have been affected by Covid-19. The PRA states that it will be closely monitoring how firms are managing the risks associated with LIBOR transition through its supervisory meetings.
- Operational resilience. Firms will be expected to take the necessary steps needed to meet the standards that will be set for operational resilience and outsourcing during 2021. Firms are encouraged to learn from their experiences over the past few months and apply this learning to operational resilience as a continuing discipline. The increase in home working has raised the risk of cyber threats and firms are expected to place greater emphasis upon cyber resilience accordingly. A cyber underwriting scenario will be included in the 2022 stress test.
- Financial risks arising from climate change. Following the letter send by the PRA to CEOs in July 2020, firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021. By the end of next year firms should be able to demonstrate that they have implemented the expectations set out in Supervisory Statement 3/19.
- PRA responsibilities after the end of the EU withdrawal period. The PRA reminds firms that it will assume a number of functions previously carried out by EIOPA.
View: PRA publishes ‘Dear CEO’ letter on ‘Insurance Supervision: 2021 Priorities’
