Chris Moulder, the PRA’s Director of General Insurance, delivered a speech to the Worshipful Company of Insurers’ iNED Forum yesterday. Here are the headlines:
- The PRA has approved 19 internal models so far. Internal models will always need to be refined over time. The PRA is (still) worried about model drift – the risk that firms will focus their refinement efforts “on areas where the model is … ‘conservative’ (rather than on areas where capital might be … less adequate), [and] firms’ capital requirements [will] trend inappropriately downwards…” The PRA will be monitoring this risk; and Boards should monitor it too;
- The PRA has “some tolerance” for ORSAs that need to be improved, if the (re)insurer is willing to listen and learn from the PRA. “We have seen reports that are too long to be readily digestible and others that are too short, missing out key areas of information … firms need to … highlight the key messages and metrics, [and] clearly sign-post … supporting documentation … [so] that … non-executive directors can engage with and use” their (re)insurer’s ORSA;
- “…subsidiary boards must be capable of acting in the best interests and safeguarding the safety and soundness of the firm for which they are responsible. Therefore … the principles of good governance should also apply … and this includes the independence of the chairman; and having a substantial and effective independent presence across the board…”;
- Although the market is still soft, many business plans still include growth for 2016. The PRA doesn’t “consider this, in itself, to be problematic. [But] firms that are looking to expand [must] do so in a responsible and sustainable manner …” Underwriting controls and discipline are of “paramount importance“. Releasing prior year reserves is “not problematic” in and of itself, if it’s “driven by genuine reserve redundancy and not a short-term temptation to improve to improve current year results“. Nor are complex reinsurance arrangements. However, “the PRA … will … challenge firms to demonstrate that reductions in capital requirements that arise from these arrangements are commensurate with real risk transfer taking place“.
(At least in his prepared remarks), Moulder did not mention #Brexit contingency planning. One possible explanation for this is that, whilst it’s clearly necessary for the Bank and PRA to contingency plan against the risk of a #Brexit, it’s not yet regard as necessary or desirable for (re)insurers to contingency plan against this risk as well. We share that view – our blog about #Brexit contingency planning is here.