The Prudential Regulation Authority (PRA) believes there is an opportunity to consider reforms that would help insurers and reinsurers invest in the UK economy.
Speaking at the Insurance Asset Management Conference, Charlotte Gerken, Executive Director for Insurance at the PRA, insisted that the regulator remains “open and ready to listen to suggestions on the specific barriers” that re/insurers face when it comes to investing.
In particular, Gerken acknowledged that regulation may in some instances make measured risk higher than actual risk, which could represent unnecessary barriers to investment.
“It is right that we explore ways to remove these, particularly where this will help to ‘unlock’ investment in green assets,” she said.
“By reforming and simplifying the regime for approving internal models and model changes, we hope to allow firms greater latitude to use forward-looking risk assessments when data is lacking or does not tell the whole story.”
Such an approach, Gerken explained, would act as a reminder that asset suitability for a particular firm is a question not only of the asset’s features, but also about the individual investor’s ability to manage the risks of the asset throughout its life.
This will be a function in part of their skills and expertise in managing the asset, and their capacity to mitigate risks that may crystallise from their exposure to that asset, and may beparticularly important where asset features may be new, or complex, or where exposures are material.
Accordingly, the PRA is considering a number of reforms, which may expand the range of assets firms can include in their matching adjustment (MA) portfolios.
And in addition to larger potential reforms, the regulator is considering other changes to the current implementation of the MA, for example by clarifying its expectations for liquidity management for certain construction phase assets may allow firms to invest in productive assets of appropriate term rather than holding cash or gilts.
Changes to streamline approval processes are also being considered, Gerken added, while other potential reforms recognise that some of the burden of managing the MA portfolio could be lessened without a material reduction in policyholder security.
“The PRA strongly supports insurers playing an important role in the real economy,” Gerken noted. “We will assess insurers’ ambitions here in the context of the risk they pose to our objectives. Any investment incentives, including that provided by the MA, must work to encourage insurers to invest well.”
“Crucially this includes ensuring that they are able to honour their commitments to policyholders, whose financial relationship with the insurer may far outlive that of the investment manager. Where we have seen good investment risk governance, this has involved boards taking a long-term view of the risks to meeting these commitments.”
“The SII review gives us the chance to step back and consider how we might pursue reforms which smooth investment processes – both in MA portfolios and in entering the market – while maintaining adequate risk management practices that are in step with appetites for strong investment returns. These, we hope, should position insurers well to perform their key functions in the real economy, including investing in the transition to net zero.”
