The Prudential Regulatory Authority (PRA) has published consultation paper CP23/17 (CP) seeking views on its draft supervisory statement (SS) (which is set out in the Appendix to the CP) on the effective financial management and planning by insurance firms and groups.
The CP is relevant to all Solvency II UK insurance firms and groups and to the Society of Lloyd's and managing agents.
The PRA has stressed that the purpose of the draft SS is not to set new expectations, but rather to complement existing policy material. The PRA expects that most insurers will already be meeting the expectations set out in the draft SS.
Summary of Proposals
The purpose of the draft SS is to set out how effective risk management and governance can be linked with the need to maintain a sound financial position. The PRA states that it is especially important for insurers with a high risk appetite or whose capital levels fluctuate significantly to have effective financial management and planning in place.
The draft SS covers the following:
- The development and maintenance of a risk appetite statement by an insurer Such a statement must be approved by the board, documented in clearly understandable terms, contain a level of detail commensurate to the nature, scale and complexity of the risks borne by the insurer, and be communicated appropriately within the insurer. The statement should include risk tolerance limits for various types of risk, the levels of capital expected to be maintained in reasonable foreseeable market conditions, and the insurer's appetite for the level and volatility of future dividend payments that it would be willing to make.
- The application of the risk appetite to an insurer's business and financial plans The PRA expects firms to have business plans consistent with their risk appetite and risk tolerance limits. The PRA proposes that insurers address risks by developing plans and management actions for managing ongoing levels of capital resources, and developing planned management actions in response to stress scenarios. Insurers' Own Risk and Solvency Assessment should also assist in ensuring that there are effective links between the business plans, risk appetite and capital management plans. Regular Management Information (MI) should be maintained and provided to the board and to relevant senior managers in order to monitor the performance of the insurer against its business and financial plans.
- The assessment of the suitability and sustainability of capital distribution plans in the context of risk appetite.
The PRA expects insurers to be able to demonstrate that any planned dividend payments are appropriate in the context of actual and projected business performance, the current and future capital position and the insurer's risk appetite.
The draft SS confirms that the PRA no longer expects insurers (other than insurers in run-off) to ask for the PRA's pre-approval of dividends, provided that:
- The insurer is within risk appetite.
- The proposed dividend leaves its capital position within risk appetite and is likely to remain so.
- The insurer's Solvency Capital Requirement coverage ratio is above 100%.