PRA outlines 2022 supervisory priorities

Written by Adam Cadle

13/01/2022

The PRA has laid out its insurance supervision 2022 priorities, stating that “insurers’ risk management needs to keep pace with the demands of a complex interaction of external risks, and with the changes insurers are making to their businesses, in order that the sector continues to be both financially and operationally resilient”.

On the issue of financial resilience, the regulator said the full impact of COVID-19 on credit portfolios is "yet to be felt", and “all firms, in life and general insurance, will need to monitor closely credit risk within their portfolios and the impact on provisioning”.

“Some life insurers have increased the profitability of writing long term annuity business by backing their liabilities with a greater proportion of higher spread assets, which may result in a greater exposure to credit and concentration risk, and in some cases greater liquidity risk. We expect your board to ensure that you have a clear understanding of exposure to credit downgrades and defaults, the impact this would have on your financial position, and your ability to recover from losses. You need to have adequate risk management in place in relation to this risk, with the board setting appropriate risk appetites, ensuring these appetites are put into practice throughout your business, and assessing your position against a range of scenarios.”

Risks around economic inflation are also expected to be monitored, the PRA stated.

Enhancing the operational resilience of the financial sector remains a strategic priority for the PRA also. It said it will continue to challenge firms to develop a dynamic, effective risk and control framework to manage the hybrid working environment and operational disruptions proportionate to their size and business functions.

Financial risks arising from climate change is also a priority for 2022. The PRA said: “Some firms have made good progress in embedding the PRA’s supervisory expectations, but progress has not been consistent across all firms, with further work required by many to meet those expectations. This year we will incorporate supervision of the financial risks posed by climate change into our core supervisory approach. Our approach will be informed by information gathered from the 2021 Climate Biennial Exploratory Scenario (CBES).”

Concerning regulatory change and Solvency II, the regulator said “it continues to work with the government on the review of Solvency II”.

“The outcome of the review cannot be prejudged, and there will be further opportunities to respond to consultations on any proposed changes to regulation or legislation. We see the objectives of the review as mutually reinforcing: growth, innovation, and investment can be best delivered by an insurance sector on a sound prudential footing. We are working with HMT to deliver a package of reforms that reduces the regulatory burden on firms and has incentives aligned with prudent risk management and with government priorities.

“We are also working with the Government to develop a targeted resolution regime for the insurance sector. A regime that ensures that insurers can be resolved in an orderly manner will reduce the risk that individual insurer failure poses to PRA objectives.”

Finally, diversity and inclusion is also a key part of the PRA’s priorities.

“Diversity helps bring a mix of views, perspectives and experiences within firms. An inclusive culture where staff can freely raise concerns and participate appropriately in decision-making can reduce the risk of groupthink, encourage debate and innovation, and support the safety and soundness of firms.”

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