On 31 May 2018, the Prudential Regulation Authority (PRA) published a ‘Dear CEO’ letter addressed to firms from Anna Sweeney, PRA director – Insurance Supervision.
The letter concerns conditions in the general insurance market, particularly for specialist risks underwritten within the London Market, and feedback from recent PRA review work.
Some key findings of the recent supervisory work show that:
- some firms are not reporting underwriting performance consistently below the levels required to achieve sustained profitability, even in years of low natural catastrophe activity;
- some firms are formulating business plans based on loss ratio (and future reserving assumptions) which appear optimistic given current market conditions and firms’ historical performance;
- in some firms, insufficient use is being made by underwriters of technical pricing models, even for lines of business where such models are generally considered to be more developed and reliable;
- some firms have reacted slowly to emerging loss development and are too reliant on managing by business plan loss ratios; and
- some firms appear to lack management information to allow them to monitor effectively the use or performance of material delegated underwriting arrangements, including broker facilities.
Sweeney states that if current market conditions persist, losses arising from weaknesses in underwriting oversight could pose a risk to the viability or sustainability of some insurers’ business models, and ultimately to their prudential soundness. Firms, therefore, would benefit from considering how they intend to adapt their strategies to ongoing market conditions and from reviewing whether their underwriting and reserving assumptions reflect current market realities. Firms who continue to exhibit some of the weaknesses outlined in this letter are more likely to find themselves under increasing supervisory scrutiny.
The PRA requests, from firms classified as a Category 1, 2 or 3 firm by the PRA, a summary of the firm’s response on the issued raised, and specifically on the weaknesses identified, by Friday 27 July 2018.