Reinsurance risk is one of the Prudential Regulation Authority’s (PRA) priorities for the supervision of life and general insurers in 2023, the Bank of England revealed.
Part of the UK’s central bank, the PRA is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. It also sets standards and supervises financial institutions at the level of the individual firm.
In a recent letter sent to all insurers, including third-country branches, supervised by the PRA, the Bank of England provided details for its 2023 priorities, which will form part of its ongoing assurance work.
These include financial resilience; risk management; implementing financial reforms; operational resilience; ease of exit for insurers; and reinsurance risk.
The letter said: “We are paying close attention to whether the continued high level of longevity reinsurance and the emergence of the more complex ‘funded reinsurance’ in the UK life market reduce the protection UK policyholders should have, beyond the risk tolerance.
“In particular, we see the potential for offshored counterparty concentration risk to arise from rapidly growing levels of reinsurance. These concentrations can arise for firms individually and for the sector as a whole. We expect UK authorised firms to consider their compliance with the Prudent Person Principle (PPP) for the risks associated with their reinsurance activities.”
It continued: “Insurers need to consider the reinsurer’s resilience over the whole duration of the exposures, as well as the potential impact from a mass recapture event where large concentrations to a small number of counterparties exist. Our own work on counterparty and concentration risk will examine the need for policy action on reinsurance structures and limits, to mitigate systemic risks to policyholders.”
Other areas of focus mentioned in the letter include non-natural catastrophe risk. The Bank of England highlighted that exposure management capability in relation to non-natural catastrophe risk (including cyber) remains immature.
Because of this, insurers – particularly those operating in the London Market -, will see this risk continue to grow and evolve as portfolio composition shifts towards casualty classes, according to the letter.
The Bank of England said: “Firms that are not able to size potential losses from non-natural catastrophe risks (including emerging risks) or establish commensurate risk management measures are exposed to the risk of outsized losses and may underestimate capital requirements. Over 2023, we intend to work with the industry to enhance practice and better manage risk in this area.”
The Bank also noted that new secondary competitiveness and growth objective for the PRA would be introduced if the Financial Services and Markets Bill is passed into law – it is currently being considered by Parliament.
It wrote: “The new objective would require the PRA to act in a way which, subject to aligning with relevant international standards, facilitates the international competitiveness of the UK economy and its growth in the medium to long-term. If appropriate, the PRA’s supervisory approach will be updated to reflect changes that are made to its statutory objectives.”
