On 31 May 2018, the Prudential Regulation Authority (PRA) published a Dear CEO letter sent by its Director of Insurance Supervision, Anna Sweeney, to the Chief Executives of specialist general insurance firms regulated by the PRA. The letter gives feedback from the PRA's recent review work on the market conditions facing specialist general insurers.

Ms Sweeney says that the conditions in the general insurance market, particularly for specialist risks underwritten within the London Market, remain challenging. There are signs that some of the longerterm prudential risks associated with a soft market, about which the PRA has been warning for a number of years, are now feeding through more demonstrably into firms’ reported results. The PRA believes boards of many firms may now benefit from reassessing whether their business models remain sustainable absent further action, and whether controls over underwriting and reserving in specialist lines are adequate in the light of some of the issues highlighted in the letter.

The letter says that over the last year, the PRA has prioritised in-depth review work with relevant insurers to assess the adequacy of firms’ oversight of underwriting and associated risks given these market trends. This work has included reviews of underwriting controls, exposure management, reserving, and trends in distribution such as the growth in delegated underwriting arrangements and specifically broker facilities. Further detail on the PRA's review work is provided in appendix 1to the letter, and the high-level feedback from its "Monitoring the Market" survey is covered in appendix 2.

The letter contains nine key findings from the PRA's recent supervisory work which include the following:

  • some firms are now reporting underwriting performance consistently below the levels required to achieve sustained profitability. even in years of low natural catastrophe activity;
  • some firms are formulating business plans based on loss ratio (and future reserving assumptions) which appear optimistic given current market conditions and firms' historical performance;
  • as well as over-optimism in business planning, some firms appear optimistic in the level of assumed future profitability used when calculating their regulatory solvency position;
  • in some firms, insufficient use is being made by underwriters of technical pricing models, even for lines of business where such models are generally considered to be more developed and reliable;
  • some firms appear to lack management information to allow them to monitor effectively the use or performance of material delegated underwriting arrangements, including broker facilities.

The PRA says that if current market conditions persist, losses arising from weaknesses in underwriting oversight could pose a risk to the viability or sustainability of some insurers’ business models, and ultimately to their prudential soundness. Firms therefore would benefit from considering how they intend to adapt their strategies to ongoing market conditions and from reviewing whether their underwriting and reserving assumptions reflect current market realities. The PRA says that firms who continue to exhibit some of the weaknesses outlined in the letter are more likely to find themselves under increasing supervisory scrutiny.

The PRA would like firms to arrange a specific board discussion on the contents of the letter, to ensure that their board is aware of the PRA's feedback, has considered whether the specific issues highlighted might exist within the firm and has assessed whether the firm needs to adjust its strategy or business model further, or strengthen oversight and scrutiny of key underwriting controls.

Firms classified as a Category 1, 2 or 3 firm by the PRA are requested to provide a summary of the firm's response on the issues raised by the PRA and specifically the key findings, by 27 July 2018.

The PRA says that firms should contact their usual supervisor in the first instance if they wish to discuss any aspect of the letter.

The PRA may also wish to discuss firms' response to the issues raised in the letter in its regular meetings with board members and senior executive management.

The PRA is undertaking some further work on reserving, and is planning a follow-up communication later in the summer to feed back its findings in more detail.