On 21 September 2016 David Rule, Executive Director of Insurance Supervision at the Prudential Regulation Authority (PRA), delivered his inaugural speech since taking on his role in July. Of particular note were his comments on managing risk in a soft market and the implications of possible market turning events (MTE). An MTE is one that has the potential to rapidly turn the market from a soft cycle to a hard cycle, which stresses some firms to the point where they breach or expect to breach their Solvency Capital Requirement (SCR) or Minimum Capital Requirement (MCR) within three months of the relevant event.

David noted that previous soft phases of insurance cycles have ended with major loses and gave examples of Hurricane Andrew, Asbestos, and 9/11 in 2001, and was keen to stress that it would be prudent for firms to plan on the basis that a significant MTE might occur at some point. With that in mind, David introduced the PRA’s latest consultation paper, CP32/16 “Dealing with a market turning event in the general insurance sector”, together with a draft supervisory statement which sets out the PRA’s expectations “in relation to significant general insurance loss events which might affect firms’ solvency and future business plans”. The paper sets out the PRA’s expectations of firms in planning for and in the event of an MTE.

The paper is relevant to all PRA-regulated Solvency II insurers, the Society of Lloyd’s, and Lloyd’s managing agents and particularly to “those operating in the global specialty insurance and reinsurance market”, when it comes to planning for and responding to MTE’s. It is particularly focused on those firms that breach or may breach their SCR or MCR within the three months following a MTE.

The PRA expects firms to consider in advance the potential impact of a MTE on their business including“what steps might reasonably be taken in advance to enable [the firm] to respond appropriately and meet their regulatory obligations”. The extent of the consideration to be given by the firm should be“proportionate to the nature, scale and complexity of the firm’s business, and the impact that a MTE is likely to have on its operations”. If a MTE could have a significant impact on the firm’s financial position or future business plans, it should also consider its approach “with regard to risk management, capital management and financing, governance, and reporting and disclosure”.

The consultation paper focuses on some of the governance, risk management, capital management and reporting capabilities that the PRA thinks firms need to consider and also sets out an indicative template containing the type of information the PRA may request from firms following a loss, and also expectations of firms with approved internal models, which will form the basis of the firm’s subsequent recovery plan.

The consultation is open until 21 December 2016 and all firms are invited to make submissions. For a copy of the PRA’s consultation paper CP32/16 and the accompanying draft supervisory statement, please select this link and, for a copy of David Rule’s covering speech, please select this link.