On 20 June 2011, the Bank of England and the FSA published a joint paper detailing their current views on the approach the PRA will take to insurance supervision. The PRA is currently expected to be created at the end of 2012 as a subsidiary of the Bank of England. The joint paper is intended to inform public debate and facilitate engagement with relevant stakeholders as the approach the PRA will take in this area is further refined.

It is noted that insurers’ liabilities are fundamentally different to those of banks and that, as insurers are less leveraged than banks, they are in general much less vulnerable to a run resulting from a sudden loss of confidence.

The PRA will have two, complimentary, objectives for insurance supervision. It will:

  1. Seek to secure an appropriate degree of protection for policyholders; and  
  2. As needed, minimalise the adverse impact that the failure of an insurer or the way it carries out its business could have on the stability of the system.  

In order to ensure that an insurer is likely to have sufficient financial resources to meet its obligations to policyholders as they fall due, the PRA will assess an insurer’s governance processes and whether these involve management making informed, forward-looking assessments of the firm’s financial strength.  

In tandem with the PRA’s supervision of insurers, the FCA will be tasked with ensuring that consumers are treated fairly in all engagements with insurance firms. Arrangements will be put in place so that there is close co-operation between the PRA and the FCA.  

The PRA’s role will not be to guarantee that policyholders are protected in all circumstances, nor will the PRA seek to ensure that no insurer fails. However, policyholders will be protected through a combination of the PRA’s supervisory approach, mechanisms by which insurers can exit the market in an orderly manner, and the existence of the Financial Services Compensation Scheme’s insurance compensation scheme.  

The PRA will seek to identify those insurance companies likely individually to pose risk to the stability of the system, and to supervise those companies in a way that reduces that risk.  

The PRA’s style of supervision will be judgement based. The nature and intensity of the supervision will be commensurate with the level of risk a firm poses to policyholders and the stability of the system. There will not be a one-size-fits-all approach, but when potential threats are identified the PRA will take supervisory action at an early stage to reduce the risk to its statutory objectives.  

It is thought that much of the PRA’s proposed approach will be achieved in practice through the application of Solvency II.

The PRA will ensure that major judgements involve its most senior and experienced individuals, using a process that is both rigorous and well-documented, and the PRA will recognise that accountability to the public is of the utmost importance.

The joint paper can be viewed here. The paper was launched at a conference on the PRA’s approach to insurance supervision. The FSA has also published two speeches from that conference, made by Hector Sants and Julian Adams. Hector Sants’ speech can be viewed here, and Julian Adams’ speech can be viewed here.