The FSA and the Bank of England have published a joint paper, The Bank of England, Prudential Regulation Authority – Our approach to insurance supervision, setting out the current thinking on how the future PRA will approach the supervision of insurers.
They say that the PRA needs to have a specific approach and objective because insurers pose risks that are different from the other firms the regulator will supervise.
The PRA will be responsible for the prudential supervision of over 2,000 firms, of which around half will be insurers, with the remainder deposit-takers and certain investment firms.
The PRA will supervise companies specialising in life insurance, general insurance and wholesale insurance, and companies that undertake a composite of these activities.
Hector Sants, chief executive of the FSA and chief executive designate of the PRA, says that in setting out the PRA’s approach, the lessons arising from previous episodes of insurance company distress have been closely examined.
He says: “Reflecting the uncertain nature of insurers’ liabilities, prudential insurance regulation will be forward-looking and judgement-based.
“Much of the PRA’s proposed approach will be achieved in practice through the application of Solvency II, the new European framework for insurance supervision.”
Julian Adams, director of insurance at the FSA, says the regulator recognises that insurers’ business models expose them to a different set of risks compared to banks.
He says: “The PRA’s regulation of insurers will seek to promote the safety and soundness of insurers to deliver two aims: to secure appropriate protection of policyholders and to contribute to the stability of the system.
“The PRA will concentrate its resources and actions on those insurance firms and issues that pose the greatest risk to its objectives.
“The risk assessment framework for insurers will explicitly take into account the need to protect policyholders, the various risks to which insurers are exposed and the different way in which insurers can fail.”
Andrew Bailey, director of UK banks and building societies at the FSA and deputy chief executive designate at the PRA, adds: “Insurance companies can in some circumstances pose risk to the stability of the financial system – via a range of channels, including as providers of funds to banks.
“The insurance supervisors will work closely with the Financial Policy Committee, who will assess system-wide risks.”
Today’s paper outlines the principles underlying the PRA’s approach, the scope of the PRA, its risk assessment framework, its forward-looking and judgment-based approach to regulation and its approach to authorising firms and approving individuals.