Through a series of announcements this week, the Prudential Regulation Authority (PRA) reiterated the need for insurers to plan for failure.
This message is certainly not new. Nor do the announcements – an updated PRA approach to insurance supervision and finalised set of Fundamental Rules – constitute a change in supervisory approach or policy. However, they confirm that the resolvability expectations communicated by the PRA in the past are being taken forward. An associated change to the PRA’s Fundamental Rules entered into force yesterday. Boards and senior management should be prepared to understand, and mitigate, the potential impact that failure will have on their firm and its policyholders.
It also became apparent that a revision of the existing resolution framework for insurers is not off the table, as the PRA confirmed that it is still working with Treasury, the Financial Services Compensation Scheme (FSCS) and the rest of the Bank of England to “assess and enhance” the current regime.
Insurance resolvability: what was announced and what does it mean for firms
Effective as of yesterday, the PRA replaced its Principles for Businesses with a set of eight high-level rules, the so called Fundamental Rules (FR). Six of these are either identical to or derived from the previous Principles. Of the two newly introduced rules, one (FR8) states that “a firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum disruption of critical services” (the other reflects the expectation that a firm must act in a prudent manner).
For insurers, this hard-wires resolvability expectations into the PRA Handbook, despite the amount of industry debate and scepticism these may have provoked. The PRA’s approach documents (both from April 2013 and yesterday’s update) also clearly make the point that “where significant barriers to resolvability are identified by the insurer or by the PRA, the PRA expects insurers to propose and implement adequate changes to reduce these”.
The PRA recognises that the provision of resolution information should be proportionate to an insurer’s systemic importance, proximity to failure or other factors, such as major transactions being contemplated. It is also indicated that an insurer’s size, complexity, level of interconnectedness and the substitutability of its products (i.e. will other products providing comparable protection be available should the insurer exit the market?) will be relevant to a resolvability assessment. The importance of substitutability is in line with PRA’s plan to look into certain types of policies, such as compulsory insurance or long-term life insurance, with a view to ensure that their policyholders are provided with a sufficient level of protection. This message was part of the PRA’s annual report announcement on Tuesday. The PRA’s resolvability considerations are also consistent with the international-level approach to identifying Global Systemically Significant Insurers.
The PRA, however, stops short of creating a formal Recovery and Resolution Plan (RRP) requirement for insurers. Instead, insurers will be judged in the context of their own perceptions of resolvability. Proposals for changes to the FSCS, which are expected shortly, will also have an impact on resolution planning.
In summary, yesterday’s publications were a clear confirmation of the PRA’s intent and will therefore increase insurers’ understanding of their supervisor’s priorities. Readiness to conduct and evidence resolvability assessments and remove barriers to resolvability should be on insurers’ agendas, particularly for the largest insurers and those providing policies the PRA has identified as “critical”.
Peter is a Director in Deloitte’s Restructuring Services practice, focussing on the financial services sector. He is a chartered accountant and a qualified insolvency practitioner specialising in insurance and financial services restructuring. Peter has advised on a number of solvent, stressed and insolvent restructurings of insurers, both life and non-life. He participated in the Financial Stability Board (FSB) discussion, chaired by Paul Tucker that considered the resolution of insurers and contributed to the International Association of Insurance Supervisors (IAIS) and FSB's thinking in this area.
Dea Markova - Deloitte, EMEA Centre for Regulatory Strategy
Dea is an Assistant Manager in the EMEA Centre for Regulatory Strategy. Her primary areas of focus are the Single Supervisory Mechanism and international, EU and UK insurance regulatory initiatives. She joined Deloitte in 2012. She has past experience in financial journalism and an academic background in financial regulation. LinkedIn