On 9 July 2013, Andrew Bailey (deputy governor of the Bank of England, and CEO of the Prudential Regulation Authority) tried to persuade delegates at the Association of British Insurers Biennial Conference in London that the PRA’s on their side.

Bailey had three key messages:

  1. “insurance supervision matters to us as much as bank supervision”:

“Insurance supervision is a skill of its own, and while our supervisors do move roles between insurance and banking in both directions, we want to ensure that we have groups of truly expert insurance and banking supervisors”. For that reason, the PRA has established two new supervisory directorates: one for general insurance, headed by Chris Moulder; and the other for life, headed by Andrew Bailey. And Moulder and Bailey both report to Julian Adam, the PRA’s executive director for insurance. “Alongside Julian, Chris and Andrew is a policy directorate headed by Paul Sharma [the PRA’s executive director for policy] who is…a true veteran of insurance supervision”. In addition, “Nick Prettejohn has joined the PRA Board [and] brings extensive insurance expertise to our work”; and “we have a new Governor and Chairman of the PRA Board, Mark Carney [who] brings his experience as Chairman of the Financial Stability Board, which is spearheading the work to create simple global capital standards for insurers…”.

From an insurance perspective, this looks like progress. In particular, it suggests the PRA is listening to feedback and trying to respond. So it’s unfortunate that has Bailey overstretched himself by claiming Sharma and Carney almost entirely for insurance when:

  • As Sharma’s PRA bio explains: “Paul leads over 150 professional staff with responsibility for all policy issues relating to the PRA’s supervision of banks, investment banks and insurers, including key initiatives such as Basel, CRD, Solvency II, FiCoD, Recovery and Resolution, ICB ring-fencing etc” – which tends to suggest that the PRA can’t be getting the full Sharma bang for its insurance buck;
  • Carney is “the outstanding central banker of his generation”; and
  • The FSB is best known for its near-final work on the supervision of Global Systemically Important Banks, and less well known for its less well advanced – but controversial - work on Global Systemically Important Insurers.  
  1. Solvency II – je ne regrette rien:

“A month or two ago I ruffled a few feathers by criticising the cost and time taken preparing for a European Directive that isn’t finalised. I have no regrets… I was making the point on behalf of firms because I feel strongly that you have been put to too much expense and time spent…” – which is true. Insurers (and reinsurers) have been put to too much expense and time spent. But Bailey is implying – especially when his comments are read in the content of his feather ruffling correspondence with Andrew Tyrie (see my blog on that correspondence, which is here) – that this waste was generated entirely by “Europe”. And that ignores the fact that it was the FSA that drove firms so hard to make them prepare for a Solvency II implementation date that would not slip. Perhaps the insurers and reinsurers domiciled in less zealous Member States have been put to much less expense and time spent than their British counterparts.

  1. Our early warning indicators are great:

“To monitor the on-going appropriateness of internal models, we have introduced the use of early warning indicators based on metrics that are independent of the model calculations. In cases where the indicator’s threshold is breached it will trigger an immediate supervisory response; a capital add-on is, in all but exceptional cases, likely to be the most effective way to restore compliance with the Solvency II calibration requirement…”

The justification and application of these indicators seems to move around. It’s not yet clear whether that’s because the PRA’s thinking is still developing, or because it’s still hoping to find a lawful justification for using the indicators. Even so, it seems tolerably clear that requiring firms to calculate the ratios on which the indicators are based will be unlawful (as a matter of UK and European law) and that imposing capital add-ons following the breach of an early warning indicator threshold could add an extra layer of illegality. And that’s before we start in on the cost of the extra capital UK firms will have to hold to meet the indicator requirements and the impact that will have on their competitive position …oh, and on UK consumers, as well.

There is still time for European law makers to save the PRA from at least some these difficulties, but it’s far from clear that they will do so. Wonder if it will still be je ne regrette rien if the result is infraction proceedings in Brussels, or a Judicial Review by insurers and/or their representative organisations?

The text of Bailey’s speech is available here.