The FSA has published a speech given by Jon Pain on 18 March (Managing Director, Supervision, FSA) entitled Our approach to insurance supervision.

In his speech Mr Pain discusses how the FSA has responded to the financial crisis and how this has strong relevance for the insurance industry. He then discusses some of the key challenges faced by the insurance industry which include preparations for Solvency II and the RDR as well as meeting the challenges of a lower period of profitability than was experienced prior to the crisis.

Mr Pain sets out the FSA’s new approach to supervision which is described as "intensive and intrusive" in order to deliver the regulator's "outcomes-focused philosophy". According to Mr Pain this new approach will rebuild trust in the supervisory system. The shift in terms of supervisory approach will be from looking at firms’ systems and controls for managing risk towards an evaluation of the risks inherent in firms’ business models.

In order to meet its supervisory objectives the FSA has recruited additional staff with specialist expertise.

Although the insurance sector has not experienced the problems seen in banking, the FSA has identified certain challenges which need to be addressed:

  • Solvency II will radically alter the capital regime for the European insurance industry, and potentially change the amount of capital some firms are required to hold. All firms in scope for Solvency II will need to review their operations and, given the far reaching nature of the Directive, the FSA anticipates that most firms will need to make substantial changes. Mr Pain urges insurers to focus their efforts on the pre-application process for internal models.
  • There is a need to increase consumer confidence and engagement in the insurance market. The recent history of mis-selling, persistency issues and high distribution costs point to the need for the industry to respond by designing products that customers actually need and which can be readily understood.
  • The FSA will seek to be more proactive and intervene earlier in the product chain to anticipate consumer detriment and tackle issues before they occur. This will require the FSA to use its integrated model of risk analysis and research to identify conduct risk much earlier; intervening further up the value chain and scrutinising products at the design stage.
  • For retail general insurers the FSA is seeking upward pressure on claims costs as the number and value of claims increase and the instances of fraud become more apparent.
  • In what is still a soft market firms may be tempted to relax underwriting controls and release reserves in order to boost their financial positions. Firms are advised not to enter into new areas of business without suitable knowledge and infrastructure.

The FSA will be introducing supervisory stress-testing. Firms will be asked to provide data to the regulator who will then test what happens to the firm in various scenarios.

More intensive and intrusive supervision will also be seen in the boardroom where the FSA is concerned that corporate governance has not been sufficiently rigorous.

For further information: Our approach to insurance supervision