On 5 July 20217, the Prudential Regulation Authority (PRA) published a policy statement (PS) entitled Dealing with a market turning event in the general insurance sector (PS16/17). PS16/17 sets out the PRA’s feedback to responses to its consultation paper of the same name CP32/16 and contains a final supervisory statement (SS5/17). PS16/17 also provides responses to recommendations made to the PRA set out in an industry White Paper published in January 2017. This follows an industry-sponsored dry run exercise simulating a $200 billion catastrophic loss event that took place in November 2016.
PS16/17 is of relevance to all PRA-regulated general insurance firms within the scope of Solvency II, the Society of Lloyd’s and managing agents.
In CP32/16, the PRA set out its proposed expectations of how general insurers, particularly those operating in the London Market, might plan for and respond to a market turning event (MTE). The PRA also proposed some areas that it would expect firms to consider in the medium- and long-term after an event, to assess the lessons which might be learned from the experience and to assess the potential consequences for their business model and risk profile.
The PRA has made several changes to the draft SS consulted on following consideration of the comments submitted by respondents and the recommendations made following the industry dry-run exercise, including:
- Further consideration of the characteristics of a MTE and its impact on firms’ model change policies;
- Addressing concerns over the speed of a regulatory response following a MTE, including the PRA’s interaction with Lloyd’s and other regulators;
- Amendments made to the example loss return template;
- Clarification of the application of proportionality and firms’ use of existing documentation such as Own Risk and Solvency Assessments (ORSAs); and
- Amendments to more explicitly draw out the importance of liquidity management following a MTE.
Chapter 2 of PS16/17 also confirms that no changes have been made to the SS regarding a breach of the Minimum Capital Requirement or Solvency Capital Requirement. Chapter 3 contains recommendations from the industry dry-run exercise.