The PRA’s Priorities for the Insurance Industry in 2024

Overview

The PRA’s outlook for the year is driven by the uncertainty in the economic outlook and the need to improve risk management in growth areas such as credit risky assets and cyber underwriting. Their concerns are also reflected in increased monitoring requirements in related areas including liquidity risk and GI model drift.

Liquidity Risk

The PRA is responding to liquidity strains from events like the Dash for Cash and Liability-Driven Investment shock by addressing gaps in insurers’ liquidity risk frameworks. In 2024, they intend to work collaboratively with stakeholders to develop consistent liquidity reporting requirements. Stress tests and a system-wide exercise aim to understand insurer behaviours and potential amplifications in stressed financial market conditions.

Ease of exit

Recognizing the dynamic nature of the insurance market, the PRA aims to balance innovation and commercial opportunities with policyholder protection. Emphasizing the importance of a safe exit process, the PRA intends to consult on requirements for insurers to prepare plans for an orderly solvent exit, ensuring confidence in the market’s robustness and facilitating business-as-usual activities.

Risk management

The PRA has observed that the life insurance sector continues to be in a period of growth, including the increase of the BPA market, and the expanding volume and range of credit risky assets. It’s crucial that insurers’ risk management, asset origination and operational capabilities are also extended correspondingly.

Regulatory reform

The forthcoming Solvency UK reforms will be a major activity for the PRA in 2024. The final policy statements will be published, and insurers are expected to complete their adoption by the end of the year. The PRA intend to provide further clarity on the updated approach to both matching adjustment and internal model review processes. They are also gathering data on insurers’ strategic investment plans, so that they can prepare appropriately for any new matching adjustment applications that may be expected.

Credit Risk

Credit risky assets are a key part of insurers’ investment portfolios. However, effective risk management capabilities are needed to support these properly. The PRA emphasises this and will focus on assessing firms’ capabilities in credit risk management in 2024.

Cyber underwriting risk

Propelled by the growing significance of cyber insurance, cyber underwriting risk demands attention, to ensure firms’ capital and exposure management align with the expanding exposure and inherent volatility. They are also monitoring other sources of uncertainty, such as (but not restricted to) contract uncertainty risk.

Claims inflation

Claims inflation remains a major concern, with a review revealing increased reserves but lingering uncertainty and potential for excessive optimism within reserving, pricing, and reinsurance planning. Further work may be required by the PRA in this area if the assessment of the risk should increase.

Model drift

Model drift relates to the propensity for models to become out of date and hence can create issues related to (for example) limited allowance for inflation uncertainty, underwriting profits, reinsurance benefits, and economic uncertainties. Several specific issues were identified in 2023, which will result in targeted supervisory actions for the relevant firms. The PRA intends to address this going forward by targeting the improvement of internal model validation.

Climate Risk

While progress has been made in implementing supervisory expectations, firms need further improvement, particularly in scenario analysis and risk management for climate-related financial risks. Enhancing scenario analysis capabilities is crucial for effective decision-making, and many firms are still integrating climate risk into their risk appetite statements, considering both qualitative and quantitative aspects across insurers’ balance sheets.

Summary

The PRA collaborates with the Bank of England to address liquidity strains and to foster a dynamic insurance market. Focus areas include life insurance growth, regulatory reforms, and credit risk management. In general insurance, PRA tackles cyber underwriting risk, claims inflation, and model drift, planning dynamic stress tests for a robust industry response. 4most stands ready to support insurers in addressing the challenges brought about by this regulatory backdrop to the insurance landscape.

Get in touch if you want to learn how 4most can support your organisation – info@4-most.co.uk

Further reading: Insurance supervision: 2024 priorities (bankofengland.co.uk)