The Prudential Regulation Authority (PRA) has published its business plan for 2022/23. The plan follows a strategic review following the first 8 years of the prudential regulator. There are now 4 strategic goals (rather than 8). These are:
- retain and build on the strength of the banking and insurance sectors delivered by the financial crisis reforms;
- be at the forefront of identifying new and emerging risks, and developing international policy;
- support competitive and dynamic markets in the sectors that we regulate; and
- run an inclusive, efficient, and modern regulator within the central bank.
For insurance companies, the strategy will focus on reform of Solvency II, stress testing and internal models in addition to issues specific to the life or general insurance sector. The PRA will consult on reforms to Solvency II shortly after the Government announces proposals (in April). The priority reforms are the following:
- reducing the level of the risk margin for long-term life insurance liabilities, making it less sensitive to interest rates;
- supporting sustainable investment by adjusting the design and strengthening calibration of the matching adjustment to better reflect actual risks retained by insurers, in particular uncertainty over the future level of credit defaults and idiosyncratic risks in individual assets;
- expanding the eligibility criteria for matching adjustment portfolios to include assets with prepayment options or variable construction phases, which will allow greater investment by the insurance sector in productive assets and in projects that support the transition of the economy to net zero;
- expanding the eligibility criteria for matching adjustment portfolios to include liabilities exposed to morbidity risk, such as income protection products;
- simplifying processes for the approval of internal models, and of matching adjustment eligibility for less complex assets, in order to remove barriers to investment and accommodate alternative risk assessment techniques for innovative assets; and
- facilitating effective competition by raising the threshold for the application of Solvency II, introducing a mobilisation process for new insurers, and reducing capital and reporting requirements for incoming branches.
In addition to the review of Solvency II, the PRA will undertake a stress test in May 2022. The result of the stress test will guide the PRA towards their priorities for the future. In order to combat group-think the PRA will undertake work in respect of diversity and inclusion, consulting on a policy in the autumn.
In terms of supervising adaptation to managing climate risks, the PRA has moved from looking at the extent to which firms have implemented plans to active supervision of firms’ response to climate threats. The largest firms will be asked to prepare a report on how climate-related financial risks have been embedded into existing risk management frameworks.
The PRA plans to work with the FCA to look at the risks posed by greater digitisation for the insurance sector. In particular, the regulators will look at increased fragmentation of the insurance value chain through outsourcing and the impact of large tech companies entering the insurance market. The PRA will also look at the impact of greater granularity in pricing as personal data is used to differentiate risks.