The regulator has been telling us the same thing for years, so why does it feel different this time?

12 October 2018

This is not the first time the PRA has written to general insurers, highlighting its concerns about the pressure on reserving and its expectations.  The first one I remember was a letter to CEOs in November 2014 – and they have been annual since. Lloyd’s have kept pace with an annual reminder to Managing Agents of the perils of the reserving cycle and the challenges of reserving for long-tail business in a soft and falling market.

This summer, the PRA has added to its list of correspondence to general insurers with not one, but two letters on the same subject.  So why does the subject warrant increased focus this year?  Perhaps the regulator is working through its list of Senior Management functions to hold to account? Perhaps the regulator feels further emphasis is needed to ensure the market is taking the issues identified seriously?

On 17th September, the PRA issued another letter to general insurers, this time addressed to Chief Actuaries. The letter not only builds on previous messaging from the Dear CEO letter, but provides more detail on concerns the PRA has. This new detail from the regulator relates to observations on optimism in pricing and business planning, highlighting the importance (or lack thereof) of coordination and feedback between underwriting, reserving and capital within companies. Given the importance of this letter, we have drafted an at a glance providing more detail on the subject.

These messages should not be a surprise, nor are they new. I don’t think, however, that it will be much longer before messages become actions, meaning companies will find themselves on the front line, if they are out of sync with the expectations of the regulator. If companies treat the regulator like the “Boy who cried wolf”, they may just find themselves getting bitten.

You will have seen that this most recent letter draws attention to a market wide reduction in reserve strength, with unrealistic profitability assumptions in both business plans and in the pricing of new business. This is in line with our own observations, as we set out in PwC’s market view analysis of London Market data.

Lloyd’s is also in the process of taking action, with a clear focus on closing or significantly curtailing loss making classes, holding a widely discussed view that some syndicate business plans just won’t be approved this year. The 2019 business and capital planning process is nearing conclusion, so we won’t have to wait long for the output.

Companies have to acknowledge the PRA's stance, given the impact of the issues identified on capital and the prudential soundness of the market, coupled with the regulator's message that further review work on these areas will be undertaken. The PRA wants to see clear plans, real action and Boards taking this very seriously.

This links nicely into the matter of accountability for Senior Managers. The latest letter seeks to highlight the role of the actuarial function in addressing these issues and highlights weaknesses in Board engagement and the function's ability to assess premium adequacy - reconfirming how seriously the PRA is taking these issues. The Chief Actuary is an easy target in many ways, given the subject matter, but this should not draw attention away from other Senior Insurance Manager Functions (SIMFs) and their role in addressing this subject.

Indeed, the PRA may well start to flex its regulatory muscles around the obligations of other SIMFs to ensure companies take stock of their concerns and act accordingly to resolve. The ambition of the Senior Insurance Manager Regime was to strengthen governance and personal accountability. Its soon-to-arrive bigger brother, the Senior Manager and Certification Regime is not going to be any easier.

So, given this, you don’t need me to tell you that the general insurance market is under increased regulatory scrutiny, from both the PRA and (for the Lloyd’s Market) the Corporation itself. So what should companies do? 

My first piece of advice is to take this seriously. Many companies believe they are different and that this only applies to others. There are, of course, differences from business to business, but to really justify being different, companies need to rely on clear, demonstrable evidence and strong track records.

The second point is to have a clear and up to date view on how good you really are. Boards and management must be very clear on their controls and governance around pricing, underwriting and reserving. The design and the effectiveness both need to be up to date, operational and also tested.

The third is clearly understanding the robustness of business planning. Business plans must be realistic and achievable, with growth (if any) needing more support than ever. Improvements in planned loss ratios should be very clearly articulated, remembering all the time that all evidence points to new business being less profitable than renewal business across the market. Business planning processes should understand how the feedback channels between pricing, underwriting and reserving are working and they should be improved and better embedded where necessary.

Above all, companies should not dismiss the letter and its messages, or imagine that it must apply to someone else.  Even if your firm is different, you will need to be able to prove that is true. A critical approach must be taken to identify deficiencies, effect change and improve.

The PRA plans to conduct further review work in the areas highlighted and follow up is to be expected, linked to both this and previous letters issued. Talk to us if you want to discuss the issues in more detail, we will be closely monitoring the emerging regulatory environment, so keep a look out for more from us on this topic. It’s different this time.

Andy Moore

Andy Moore | Partner
Profile | Email | +44 (0)7702 677 654

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