PRA sets out 2021 supervisory priorities

Written by Adam Cadle

15/12/2020

The PRA has today set out its 2021 supervisory priorities for the UK insurance sector.

In a letter addressed to CEOs of PRA-regulated insurance firms, PRA executive directors, insurance, Charlotte Gerken and Anna Sweeney said financial resilience is key.

“The outlook for credit risk remains highly uncertain, and insurers are exposed to downgrades and defaults that would accompany any deterioration in credit fundamentals, the letter stated.

“In view of the illiquid nature of much of the sector’s credit exposure, both through direct investments and counterparty risks in, for example, reinsurance contracts, we expect your board to satisfy itself that the firm is resilient to a wide range of potential adverse credit scenarios in the short and medium term. Scenarios should vary in both severity and scope, encompassing for example both general deterioration via an economic downturn as well as deeper distress in sectors to which the firm has concentrated exposures or which are particularly exposed to current risks. The assessment of resilience should encompass both the firm’s capital position and the risk management of illiquid exposures – management of concentration risk in line with the requirements of the prudent person principle for example, and early engagement with potentially distressed debtors.”

Another comprehensive insurance stress test (IST) will be run in 2022, and in 2021 the PRA said it will develop its approach to recovery and resolution planning.

The PRA said it expects intensive efforts to be made in 2021 around LIBOR and the transition to alternative risk-free rates.

On the issue of climate change, the regulator said firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021. Five UK life insurers and six UK general insurers will participate in the Climate Biennial Exploratory Scenario (CBES), which will launch in June 2021.

“We expect firms not participating in the CBES to assess the impact of climate risk on their balance sheets in different scenarios and, from these, identify any major risks.”

The full list of 2021 supervisory priorities can be accessed here.

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