Paul Fisher, Deputy Head of the PRA and interim Executive Director of Insurance Supervision, gave a speech on Regulation and the future of the insurance industry in which he explained that the successful implementation of Solvency II is a top priority for the PRA. With transposition of the Directive into the UK rulebook underway, the PRA will be open for applications for internal models, matching adjustment etc. from April 1, 2015.
Fisher reiterated the PRA’s belief that the UK insurance industry is in a good position, having had the risk-based ICAS regime around for ten years. The PRA is not looking to use Solvency II as an opportunity to raise capital requirements across the board and will implement the Directive as intended, without gold plating. Solvency II strengthens the linkage between capital and risk management requiring firms’ management to decide upon their chosen risk appetite and the precise details of their risk models. The PRA will not seek to restrict innovation in the market or fix firms’ business models to be identical but will ensure that firms hold capital commensurate to their risk exposures.
The introduction of the Prudent Person Principle, says Fisher, is an example of how risk management and strategic decision making will be owned by the insurer and its management. The shift from quantitative to qualitative rules means insurers will have more flexibility in their investment choices. The PRA wants to avoid undue influence on the asset allocation behaviour of insurers and will not promote one asset class over another. The Prudent Person Principle will ensure that firms fully understand and manage their investment risks. Specifically, insurers must be able to demonstrate that they can ‘properly identify, measure, monitor, manage, control and report on their investment risks and not place reliance upon information provided by third parties’.
On the role of management, Fisher notes that there has been some industry uncertainty around the PRA’s expectations of non-executive directors for firms that have internal risk models. Non-executive board members are not expected to be technical experts in risk modelling, however, each board collectively should understand the key strengths, limitations and judgements within their model. The PRA wants non-executives to have ‘the right tools and sufficient knowledge to be able to challenge model outputs, rather than follow them slavishly’.
The PRA also recognises some other challenges facing the industry in particular the changes to the UK taxation system of the ‘at retirement’ market. This will have a significant impact on some insurers’ business models. The PRA remains, states Fisher, committed to working openly and transparently with the insurance industry to get the best outcome.
Regulation and the future of the insurance industry, 22 January 2015