The PRA’s new approach to the authorisation and supervision of insurance branches

Overview

This article provides a summary of the consultation paper from the Prudential Regulation Authority (PRA), which discussed the future of the authorisation and supervision of insurance branches in the UK. The objective is to consult and introduce a new statement of policy and amend Solvency II to include the PRA’s expectations of third-country branches.

These new policies are set to be enforced by Q2 2024. The purpose of the consultation is to implement the lessons learnt from the Temporary Permissions Regime (TPR), which is scheduled to end on December 31st 2023. The PRA’s primary objective is to promote the safety and soundness of firms, and these new proposals would strengthen those objectives. There will be minimal impact on competition in the UK and on third-country branches currently authorised by the PRA.

Enhanced Guidance on Third-Country Insurance Branch Supervision

A new Statement of Policy (SoP), replacing supervisory statement (SS) 2/18, will clarify the PRA’s approach to authorizing and supervising third-country insurance branches. While the substantive approach remains unchanged, this new SoP will offer more details on risk assessment including factors like: the branch’s ability to meet threshold conditions; equivalence of the home jurisdiction’s supervision; effective supervision; cooperation with the home supervisor; priority for UK policyholders in insolvency; compliance with PRA rules; and applicability of the Senior Managers and Certification Regime. The PRA emphasizes assessing the significance of the branch’s UK operations compared to other jurisdictions to determine viability and potential subsidiarization.

Reinsurance arrangements of a third-country branch

During the TPR, the PRA discovered that applications contained a wide variety of complex reinsurance arrangements, thus the PRA proposes to set out its approach to considering the implications of reinsurance arrangements.

Overreliance on reinsurance is an area of concern. Impacting incentives for prudent risk selection and management, thus the PRA focuses on levels of intra-group reinsurance, aggregate reinsurance cessions and concentration of reinsurance arrangements.

Such instances are where there are high levels of intra-group reinsurance being ceded by the third-country branch, allowing for aggregate capital protecting policyholders could be reduced, or where the third-country branch undertaking cedes more risk than is retained, deteriorating the independence of such branch.

Further guidance on Solvency Assessments

The PRA also plans to provide further guidance on Own Risk and Solvency Assessment (ORSA) reporting, allowing branches to submit their parent company’s ORSA if it sufficiently covers branch-specific risks.

Additionally, the PRA aims to specify requirements for outsourcing, operational risk, and reinsurance counterparty risk, aligning language with the PRA Rulebook for enhanced transparency and clarity. These updates are intended to support third-country branches during the regulatory process. In the case of a third-country branch re-domiciling to another home jurisdiction, the PRA would expect a new branch application to be submitted as the new home jurisdiction could alter the PRA’s risk assessment.

In summary, the PRA plans to enforce these proposals from Q2 2024, thus it is imperative that firms impacted by these changes understand the modifications to the policies and are prepared for these updates. At 4most, we remain committed to offering our clients in the insurance industry the requisite resources and expertise to navigate these changes effectively.

References: CP21/23 – The PRA’s approach to the authorisation and supervision of insurance branches | Bank of England