With responsibility for the prudential supervision of all authorised insurers in the UK, the PRA has the unenviable task of supervising approximately 600 insurance firms. That's on top of the approximately 1,000 banks, building societies, credit unions, and designated firms that it supervises. It is therefore unsurprising that the PRA is concerned to understand how it is performing against the PRA's insurance objective.
The PRA's statutory insurance objective requires the PRA to contribute to the securing of an appropriate degree of protection for those who are or may become insurance policyholders. The PRA stated that its role in protecting policyholders is to ensure that there is a reasonably high probability that an insurer is able to meet its obligations to policyholders and that, in the event an insurer is unable to meet those obligations, the consequences for policyholders are minimised by ensuring that the insurer fails in an orderly manner.
The Court of the Bank of England (the Bank's board, now known as the Prudential Regulation Committee (the PRC) commissioned its Independent Evaluation Office (the IEO) to assess the PRA's approach to its policyholder protection duties. The IEO was established in September 2014 as a core part of the Bank's strategic plan and is responsible for evaluating the Bank's performance. Whilst the IEO identified a lot of positives, it found that the PRA is lacking in articulating its approach to its policyholder protection responsibilities. The IEO recognised that a large body of work was undertaken by the PRA in respect of its insurance responsibilities in the period running up to, and immediately following, its inception but that this seemed to have been “crowded out” by live supervisory issues, as well as by the considerable work involved in implementing the Solvency II Directive (2009/138/EC).
In particular, the IEO's key recommendations were that the PRA needed to (i) articulate more fully its strategy and approach to its insurance objective, (ii) communicate, internally and externally, its preferred strategy and approach, (iii) clearly implement its preferred strategy and approach and, (iv) enhance its framework for co-ordination with the Financial Conduct Authority with respect to its insurance objective.
The PRA was accepting of the IEO’s evaluation, which the PRA considers was an informative and balanced assessment of the PRA's approach to its insurance objective. It published a full response, together with an action plan. The PRC plans to monitor the PRA's implementation of the recommendations as part of its wider follow-up framework for IEO reports. As a proactive measure, the PRA intends to present a paper to the PRC by September 2017, on the legal interpretation of the insurance objective, the interaction of the insurance objective with the general objective and the definition of regulatory failure.