1. The PRA Approach to Supervision for Smaller Insurers
Patrick Connolly
Manager, Retail General Insurance Team
Topics:
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
1.1 The Regulatory Framework
Key:
FPC
FCA
Financial Policy Committee
Financial Conduct Authority
Source: Bank of England Quarterly Bulletin, Q4 2012
The PRA Approach to Supervision
1.1 The Regulatory Framework
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
1.2 Firm Categorisation
All firms
Cat 5 Firms
Cat 1
Cat 2
Cat 3
Cat 4
84
186
303
Cat 5 Live
Cat 5 Run-off
101
49
16
33
Cat 5 P&I
Clubs
5
The PRA Approach to Supervision
1.2 Firm Categorisation
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
1.2 Firm Categorisation
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
1.2 The Supervisory Approach
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
1.3 The Supervisory Approach
“Forward-looking and judgement-based supervision…”
What does this mean in practice?
The PRA Approach to Supervision
1.3 The Supervisory Approach
PSM Peer
Group 3
PSM Peer
Group 4
PSM = Periodic Summary
Meeting, sets our supervisory
strategy
Cat 5
Cycle
PSM Peer
Group 2
PSM Peer
Group 1
Annual Returns
Submitted
Review
Annual
Returns
The PRA Approach to Supervision
1.3 The Supervisory Approach
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
1.4 Regulatory Co-ordination
•
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
1.
The PRA Approach to Supervision for Smaller Insurers
Patrick Connolly
Manager, Retail General Insurance Team
Topics:
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
1.1 The Regulatory Framework
Key: FPC
FCA
Financial Policy Committee
Financial Conduct Authority
Source: Bank of England Quarterly Bulletin, Q4 2012
The PRA Approach to Supervision
1.1 The Regulatory Framework
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
1.2 Firm Categorisation
All firms
Cat 5 Firms
Cat 1
Cat 2
Cat 3
Cat 4
84
186
303
Cat 5 Live
Cat 5 Run-off
Cat 5 P&I
Clubs
101
49
16
33
5
The PRA Approach to Supervision
1.2 Firm Categorisation
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
1.2 Firm Categorisation
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
1.2 The Supervisory Approach
Firm Enquiries Function
•
Supervision Team
Queries relating to:
– Returns
– Authorisation process
– The Handbook
– First reporting of crystallised risks
•
•
•
•
Authorisations
– Changes in Control
– Approved persons (red channel)
– Part VII transfers
Capital issues
Strategic issues
FCA interaction
The PRA Approach to Supervision
1.3 The Supervisory Approach
“Forward-looking and judgement-based supervision…”
What does this mean in practice?
The PRA Approach to Supervision
1.3 The Supervisory Approach
PSM Peer
Group 3
PSM Peer
Group 4
PSM = Periodic Summary
Meeting, sets our supervisory
strategy
Cat 5
Cycle
PSM Peer
Group 2
PSM Peer
Group 1
The PRA Approach to Supervision
Annual Returns
Submitted
Review
Annual
Returns
1.3 The Supervisory Approach
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
1.4 Regulatory Co-ordination
•
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