Manager, Retail General Insurance Team

1.1
1.2
1.3
1.4
1.5
The Regulatory Framework
Firm Categorisation
The Supervisory Approach
Regulatory Co-ordination
Communication
The PRA Approach to Supervision

Key: FPC Financial Policy Committee
FCA Financial Conduct Authority
Source: Bank of England Quarterly Bulletin, Q4 2012
The PRA Approach to Supervision

The PRA’s statutory objectives:-
• General objective :
“promoting the safety and soundness of PRA-authorised firms”
• Insurance objective:
“contributing to the securing of an appropriate degree of protection for those who are or may become policyholders”
The PRA Approach to Supervision

Cat 1
Cat 2
Cat 3
Cat 4
Cat 5 Live
Cat 5 Run-off
Cat 5 P&I
Clubs
84
49
33
303
5
186
16
101
The PRA Approach to Supervision

Category 4
Insurers whose size …….. “ very little capacity individually to cause disruption to the UK financial system.
……………”.
Category 5
Insurers whose size, interconnectedness, complexity and business type give them almost no capacity individually to cause disruption to the UK financial system by failing or by carrying on their business in an unsafe manner, but where difficulties across a whole sector or subsector may have the potential to generate some disruption .
They have no capacity to cause disruption to the interests of a substantial number of policyholders.
The PRA Approach to Supervision

Supervisory Models
• Category 4 firms:
• Annual supervisory assessment visit
• Desk-based reviews of returns and Management Information
• Issue-driven meetings and reactive work
• Peer group and trend analysis
• Category 5 firms:
• Firm Enquiries Function for routine queries
• Broadly reactive supervision in response to crystallised risks
• Some proactive analysis and assessment at solo and peer-group level
The PRA Approach to Supervision

Firm Enquiries Function
• Queries relating to:
– Returns
– Authorisation process
– The Handbook
– First reporting of crystallised risks
Supervision Team
• Authorisations
– Changes in Control
– Approved persons (red channel)
– Part VII transfers
• Capital issues
• Strategic issues
• FCA interaction
The PRA Approach to Supervision

“Forward-looking and judgement-based supervision…”
What does this mean in practice?
The PRA Approach to Supervision

PSM Peer
Group 3
PSM = Periodic Summary
Meeting, sets our supervisory strategy
PSM Peer
Group 2
PSM Peer
Group 4
Annual Returns
Submitted
PSM Peer
Group 1
Review
Annual
Returns
The PRA Approach to Supervision

Threshold Conditions
• Minimum requirements that firms must meet at all times in order to be permitted to carry out regulated activities
• Firms will need to meet both PRA-specific and FCA-specific threshold conditions
• PRA-specific threshold conditions:
– Legal status
– Location of offices
– Prudent conduct
– Suitability
– Effective supervision
• The PRA will assess firms against the threshold conditions on a continuous basis
The PRA Approach to Supervision

• Effective delivery of our approach requires co-ordination with the FCA
– Focussed at firm level
– MoU and colleges to ensure statutory duty to co-ordinate is effective
• Firm-specific supervision alone is not sufficient to deliver financial stability. Must be complemented by an effective macroprudential regime
– Two-way flow of information and exchange of views between the PRA and the FPC
– PRA responsible for implementing relevant FPC recommendations on a ‘comply or explain’ basis
– FPC has powers to direct the PRA
The PRA Approach to Supervision

Our main objectives are to:
• Communicate the PRA objectives and expectations to industry clearly.
• Understand market trends in order to inform our forward-looking approach and communicate supervisory priorities for the sector.
• Raise awareness of the information and support available to smaller insurers.
The PRA Approach to Supervision

1.
The PRA Approach to Supervision for Smaller Insurers
Patrick Connolly
Manager, Retail General Insurance Team

1.1
1.2
1.3
1.4
1.5
The Regulatory Framework
Firm Categorisation
The Supervisory Approach
Regulatory Co-ordination
Communication
The PRA Approach to Supervision

Key: FPC Financial Policy Committee
FCA Financial Conduct Authority
The PRA Approach to Supervision
Source: Bank of England Quarterly Bulletin, Q4 2012

• General objective:
“promoting the safety and soundness of PRA-authorised firms”
• Insurance objective:
“contributing to the securing of an appropriate degree of protection for those who are or may become policyholders”
The PRA Approach to Supervision

Cat 1
Cat 2
Cat 3
Cat 4
Cat 5 Live
Cat 5 Run-off
Cat 5 P&I
Clubs
84
49
33
5
All firms
303
Cat 5 Firms
186
16
101
The PRA Approach to Supervision

Category 4
Insurers whose size …….. “ very little capacity individually to cause disruption to the UK financial system.
……………”.
Category 5
Insurers whose size, interconnectedness, complexity and business type give them almost no capacity individually to cause disruption to the UK financial system by failing or by carrying on their business in an unsafe manner, but where difficulties across a whole sector or subsector may have the potential to generate some disruption .
They have no capacity to cause disruption to the interests of a substantial number of policyholders.
The PRA Approach to Supervision

Supervisory Models
• Category 4 firms:
• Annual supervisory assessment visit
• Desk-based reviews of returns and Management Information
• Issue-driven meetings and reactive work
• Peer group and trend analysis
• Category 5 firms:
• Firm Enquiries Function for routine queries
• Broadly reactive supervision in response to crystallised risks
• Some proactive analysis and assessment at solo and peer-group level
The PRA Approach to Supervision

Firm Enquiries Function
• Queries relating to:
– Returns
– Authorisation process
– The Handbook
– First reporting of crystallised risks
Supervision Team
• Authorisations
– Changes in Control
– Approved persons (red channel)
– Part VII transfers
• Capital issues
• Strategic issues
• FCA interaction
The PRA Approach to Supervision

“Forward-looking and judgement-based supervision…”
What does this mean in practice?
The PRA Approach to Supervision

PSM Peer
Group 3
PSM Peer
Group 4
PSM = Periodic Summary
Meeting, sets our supervisory strategy
PSM Peer
Group 2
January
Capital
Cat 5
Cycle
October
Capital
April
Capital
July
Capital
Annual Returns
Submitted
PSM Peer
Group 1
The PRA Approach to Supervision
Review
Annual
Returns

Threshold Conditions
• Minimum requirements that firms must meet at all times in order to be permitted to carry out regulated activities
• Firms will need to meet both PRA-specific and FCA-specific threshold conditions
• PRA-specific threshold conditions:
– Legal status
– Location of offices
– Prudent conduct
– Suitability
– Effective supervision
• The PRA will assess firms against the threshold conditions on a continuous basis
The PRA Approach to Supervision

• Effective delivery of our approach requires co-ordination with the FCA
– Focussed at firm level
– MoU and colleges to ensure statutory duty to co-ordinate is effective
• Firm-specific supervision alone is not sufficient to deliver financial stability. Must be complemented by an effective macroprudential regime
– Two-way flow of information and exchange of views between the PRA and the FPC
– PRA responsible for implementing relevant FPC recommendations on a ‘comply or explain’ basis
– FPC has powers to direct the PRA
The PRA Approach to Supervision

1.5 Communication
Our main objectives are to:
• Communicate the PRA objectives and expectations to industry clearly.
• Understand market trends in order to inform our forward-looking approach and communicate supervisory priorities for the sector.
• Raise awareness of the information and support available to smaller insurers.
The PRA Approach to Supervision