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

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

3. 1.1 The Regulatory Framework
Key: FPC Financial Policy Committee
FCA Financial Conduct Authority
Source: Bank of England Quarterly Bulletin, Q4 2012
The PRA Approach to Supervision

4. 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

5. 1.2 Firm Categorisation All firms Cat 5 Firms
The PRA Approach to Supervision

6. 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

7. 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

8. 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

9. 1.3 The Supervisory Approach
“Forward-looking and judgement-based supervision…”
What does this mean in practice?
The PRA Approach to Supervision

10. 1.3 The Supervisory Approach
PSM Peer Group 4
Annual Returns Submitted
Review Annual Returns
PSM Peer Group 1
PSM Peer Group 2
PSM Peer Group 3
April Capital
July Capital
October Capital
January Capital
Cat 5
Cycle
PSM = Periodic Summary Meeting, sets our supervisory strategy
The PRA Approach to Supervision

11. 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

12. 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

13. 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

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

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

16. 1.1 The Regulatory Framework
Key: FPC Financial Policy Committee
FCA Financial Conduct Authority
Source: Bank of England Quarterly Bulletin, Q4 2012
The PRA Approach to Supervision

17. 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

18. The PRA Approach to Supervision
1.2 Firm Categorisation
All firms
Cat 5 Firms
The PRA Approach to Supervision

19. 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

20. 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

21. 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

22. 1.3 The Supervisory Approach
“Forward-looking and judgement-based supervision…”
What does this mean in practice?
The PRA Approach to Supervision

23. 1.3 The Supervisory Approach
PSM Peer Group 4
Annual Returns Submitted
Review Annual Returns
PSM Peer Group 1
PSM Peer Group 2
PSM Peer Group 3
April Capital
July Capital
October Capital
January Capital
Cat 5
Cycle
PSM = Periodic Summary Meeting, sets our supervisory strategy
The PRA Approach to Supervision

24. 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

25. 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

26. 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