Clifford Chance

On Wednesday 12 January, the Prudential Regulation Authority (PRA) published a 'Dear CEO' letter from Anna Sweeney and Charlotte Gerken, joint executive directors of insurance, detailing focus areas for 2022. The letter was sent to all insurers, including third-country branches, supervised by the PRA and contains a high-level 'to do list' for firms both in the general and life sector.

As also noted in the PRA's 2021 priorities letter, the PRA states that the UK insurance industry continues to change shape, including a noted shift to specialisation. While recognising benefits from the latter, the PRA believes that increased concentrations in business and/or operating models bring vulnerabilities that need effective risk management and mitigation. The PRA confirms that the Solvency II review will continue to be a focus for both the PRA and UK insurance firms throughout 2022.

Other key PRA priorities for 2022 include:

Financial resilience

• As Covid-19 continues to impact the UK and other global economies, the resilience of the financial sector remains paramount for the PRA to ensure the UK financial system can continue to support businesses and households.
• As the full impact of Covid-19 on credit portfolios is yet to be felt, the PRA think recovery is likely to be uneven across sectors as official sector support schemes are withdrawn and whilst inflation remains high.
• For the above reasons, the PRA makes clear its expectation that all firms, in life and general insurance, need to monitor closely credit risk within their portfolios. The PRA also expects UK boards to have a clear understanding of exposure to credit downgrades and defaults and firms need to have in place adequate risk management in place to this risk.
• The PRA expect retail general insurers to manage the impact on their business models of the updated rules on pricing set out in Financial Conduct Authority (FCA) Policy Statement (PS) 21/11. The PRA will monitor the impact of these rules on insurer business models and underwriting practices across the market and expects firms to continue to underwrite on a sustainable basis.

Operational risk and resilience

• Enhancing the operational resilience of the financial sector remains a strategic priority for the PRA.
• The PRA's expect firms to develop their security controls and capabilities to manage the increasing risk of cyber threats, as set out in Supervisory Statement (SS) 1/21.
• By Thursday 31 March 2022, the PRA expects firms to have identified and mapped their important business services; set impact tolerances for these and initiated a programme of scenario testing.
• The PRA will introduce new expectations on outsourcing and third-party risk management (SS2/21) effective from 31 March 2022 to strengthen PRA expectations on operational resilience, and to facilitate greater resilience of services provided by third parties including the cloud and other technologies. Under SS2/21 firms should already maintain an updated register of their outsourcing arrangements.

Regulatory change

• The PRA will continue to work with the Government on the review of Solvency II.
• In the early part of this year, the PRA will be analysing the Summer 2021 Quantitative Impact Study data ahead of formal consultation on a package of measures later in the year.
• The PRA is working with the Government to develop a targeted resolution regime for the insurance sector.
• The PRA is also continuing to explore ways to improve its approach to authorising ILS vehicles and other wholesale insurance firms to ensure the process and time taken are proportionate to the risks.

Third-country branches seeking authorisation in the UK

• The PRA expects to process c.150 third-country branch applications from insurers currently in the Temporary Permissions Regime (TPR) throughout 2022-23.
• The PRA will continue to use its powers, including the power to direct firms to make applications under Part4A of FSMA during a specified period, to ensure that the flow of applications is managed effectively.

Diversity & Inclusion Discussion Paper

• (DP) 2/218 sets out the PRA's ambition to support the resilience of the financial services sector, by encouraging diversity within firms.
• While the PRA recognise that change takes time, they expect firms to consider the themes set out in DP2/21, challenge themselves to understand their gaps and consider where they can make progress within their institutions.

Overall, the letter signifies that the long-term strategic objectives of the PRA have not changed much given the strong emphasis on continuity especially on themes of financial stability and operational resilience. However, diversity and inclusion priorities and regulatory change remain high on the PRA's agenda and, accordingly, firms should also place significance on these areas and monitor developments in this space. Market participants are advised to read the PRA’s pointers to the future carefully so that the content of the next supervisory meeting does not come as a surprise.

The full letter can be accessed here.