The PRA has published a Consultation Paper (“CP”) on dealing with market turning events in the insurance sector in which it sets out a draft supervisory statement (“SS”) on its expectations of how general insurance firms regulated by the PRA should respond to a Market Turning Event (“MTE”). The SS is addressed to all UK general insurance firms regulated by the PRA within the scope of the Solvency II Directive (Directive 2009/138/EC).

What is an MTE?

The PRA refers to an MTE as a large general insurance loss event which might impact significantly on a firm’s capital resources or future business plans.

The below non-exhaustive list of consequences indicate an MTE:

  • the event is likely to generate significant insurance claims to a number of firms operating in the general insurance market;
  • it might take time to be certain of the full extent of claims and their settlement cost;
  • some firms might no longer have sufficient financial resources to meet their regulatory capital requirements or might not know for some time how the event has impacted their regulatory capital position;
  • the event impacts prevailing market conditions for general insurance products including the availability, price and/or terms of insurance coverage that firms are able to offer policyholders for future policies; and
  • some firms might need to raise additional capital in order to continue to trade, or might wish to raise additional capital to take advantage of perceived market opportunities.

What are the PRA’s expectations?

The PRA expects firms to consider in advance the possible implications of an MTE on their business and what steps could be taken in advance to enable them to respond appropriately and meet their regulatory obligations. The level of consideration should be proportionate to the nature and scale of a firm’s business.

Firms should consider their approach with regards to risk management, capital management and financing, governance, and reporting and disclosure.

Risk Management – as part of their general governance and risk management, the PRA expects firms to put in place appropriate processes and procedures that would enable them to prepare for and manage the impact of an MTE on their business.

Capital management and financing – firms are required to monitor their capital requirements on an ongoing basis. In the event of a breach or potential breach of the solvency capital requirements or minimum capital requirements, firms are required to inform the PRA within three months and provide either a realistic recovery plan or finance schedule.

Governance – firms should make appropriate arrangements to ensure their senior management teams are able to provide adequate management oversight following an MTE, and in particular, provide assurance on the firm’s financial position and contingency conditions available to them to improve that position e.g. recapitalisation options.

Reporting and disclosure – firms should consider what notifications or applications they might need to make to the PRA, the Society of Lloyd’s or other authorities following a large loss event and ensure these notifications can be made in good time.

PRA data collection following an MTE

If the PRA believes that an insurance loss event has occurred, it will contact firms though usual channels to gauge their initial estimates of the likely financial impact. The PRA expects firms to seek to understand the impact on their solvency capital requirements as quickly as possible.

After the event the PRA may collect information from affected firms through an ad hoc data request. It will generally issue this information request within a week of the identification of a significant general insurance loss event.

Next steps

Responses to the consultation are requested by 21 December 2016 and should be sent to John Reed at the PRA (CP32_16@bankofengland.co.uk).