The Prudential Regulation Authority (PRA) has set out its priorities for the UK re/insurance sector in 2021, which include a focus on financial resilience, credit risk, the impact of COVID-19, the Brexit transition period, and climate change.
The UK regulator noted that re/insurers have thus far proved largely resilient to the COVID-19 pandemic, but warned that the economic outlook remains uncertain.
And the sector continues to face many other sources of stability such as low interest rates and political changes, which remain live despite being somewhat overshadowed this year.
In the context of the UK’s exit from the EU, the PRA added that there is an opportunity to further tailor regulations to the UK market such as through HM Treasury’s consultations on the Future Regulatory Framework and review of the Solvency II regime.
Currently, the outlook for credit risk in the UK market remains highly uncertain due to some of the factors already noted, and insurers are exposed to downgrades and defaults that would accompany any deterioration in credit fundamentals.
Going forward, the PRA expect re/insurers to continue to improve the stress and scenario testing they undertake to inform decision-making, including around risk and capital appetite, and strategy setting.
The regulator also intends to build on previous, sector-wide insurance stress test (IST) exercises to develop stress testing as a supervisory tool for measuring sector resilience to specific shocks and to explore its use to provide assessments of capital adequacy.
It plans to run another comprehensive IST in 2022 to build on the previous 2019 exercise and identify where investment is needed to improve stress testing.
As another area of focus for next year, the PRA expects re/insurers to make “intensive efforts” to reduce their reliance on LIBOR, which is seen as a risk to the stability of the global financial markets.
The Authority warned that it “will keep a range of supervisory tools under review for use where we see insufficient progress, or incidents of poor risk management or governance of transition.”
Additionally, the PRA intends to set new standards for operational resilience in 2021, informed by the lessons from the pandemic, as well as the growing threat of cyber.
Re/insurers will also be expected to have implemented new approaches to managing climate-related financial risks. In line with this, the Climate Biennial Exploratory Scenario (CBES) will launch in June to test the resilience of the largest banks, insurers, and the financial system to the physical and transition risks from climate change.
And finally, the PRA explained that, following the end of the Brexit transition period, it will assume a number of functions previously carried out by the European Insurance and Occupational Pensions Authority, including the publication of technical information (TI) used in the calculation of insurance liabilities.
