The PRA published its annual report for 2014 on June 17 including a review of 2013/14 and business plan for 2014/15. For the insurance industry, the following highlights should be noted. Clearly, governance and risk management are considered to be at the top of the agenda for the PRA who continue to focus on senior persons responsibility in prudential supervision.

Governance, controls and risk management account for nearly half of s.166 reviews

There were 33 section 166 reports by skilled persons in 2013/14 (up from 27 in 2012/13), four of which were commissioned using the new PRA power to contract directly with a skilled person. Prudential insurance issues were the subject of 8 skilled persons reviews, while governance, controls and risk management framework was the focus of 16 reviews. Both the total cost to firms concerned (£11.4m) and the cost per report (ranging between £14,602 and £1.3m) dropped from the previous year.

Greater protection for certain policyholders

The PRA is considering adapting its supervisory approach to give particular focus to certain types of insurance or policyholders that might require a higher degree of protection, with a particular focus on compulsory insurance. The regulatory approach will take into account the impact of the cover being withdrawn and the ability of and cost to the policyholder of obtaining insurance from another provider. Any disruption to compulsory insurance could, the PRA argues, have an impact on the real economy and long-term life insurance products.

The PRA acknowledges that tension between the general objective (safety and soundness) and the insurance objective (policyholder protection) may arise when a firm is stressed. With-profits business is one example of when this type of situation could occur; management action to protect solvency might cause with-profits policies to underperform relative to policyholder expectations. In such circumstances, the PRA will exercise its supervisory judgement and consider the trade-offs between the objectives to determine whether policyholders are best protected by: continuation of the firm if possible; closure to new business and solvent run-off; or the firm’s orderly failure.

The extent to which the insurance objective applies to UK policyholders of incoming EEA branches and non-UK policyholders of UK groups, will need to be clarified by the PRA.

Key dates

The annual report also sets out upcoming policy consultations and key deliverables over the next year:

  • transposition of Solvency II is a priority with consultation in Q2 (June-August) and feedback and final rules expected between December and February;
  • consultations on remuneration and the senior manager regime are expected in Q2;
  • the PRA will consult on insurance policyholder protection in Q3 (September – November); and
  • a key deliverable in Q4 is to support and influence work carried out by the International Association of Insurance Supervisors on the development of the basic capital requirement for global systemically important insurers.

The PRA invites responses on the annual report, the way in which the PRA has discharged its functions (or failed to do so) and the extent to which the PRA has advanced its statutory objectives by September 17, 2014.

View PRA annual report and accounts 2014, 17 June 2014