On 20 June 2011, the Bank of England and the Financial Services Authority published a joint paper (click here for a copy) outlining their current thinking on how the Prudential Regulation Authority (PRA), once established, will approach the supervision of (re)insurers. Acknowledging that the nature of (re)insurers' business models exposes them to a different set of risks than banks, the paper sets out how the PRA will adapt its supervisory methods accordingly.

Regulation will be "forward-looking" and "judgement-based", with the PRA seeking to assess vulnerabilities in firms' business models, reserving, solvency position, governance, risk management and controls that cast into doubt their ability to deliver on policyholder obligations. The PRA will have a dedicated supervisory group for Lloyd's and its managing agents.

The paper states that firms will be expected to consider the PRA's two complementary insurance objectives – securing appropriate protection of policyholders and contributing to the stability of the system – when managing their businesses. It is anticipated that much of the PRA's proposed approach to the regulation of insurers will in practice be achieved through the application of Solvency II.