Letter from Charlotte Gerken and Shoib Khan ‘Insurance Supervision: 2023 priorities’

The Prudential Regulation Authority, PRA, has published a Dear CEO Letter addressed at chief executive officers (CEOs) of PRA-regulated insurance enterprises. Therein, the PRA specifies its 2023 (supervisory) priorities regarding insurance and reinsurance undertakings operating in the UK. The key priorities are briefly summarized below:
(1) Financial resilience: As the economic outlook is rather sobering with a forecasted recession in the UK and as inflation remains high, insurance companies should closely monitor their asset portfolios in terms credit and concentration risks and should perform adequate stress tests to reflect „adverse credit scenarios“. Additionally, the PRA urges insurers to assess the impact of inflation on the cost of claims and to factor in any inflation into their pricing models and business planning.
(2) Operational risk and resilience: In this context, the PRA primarily names three issues that will be of focus: the resilience regarding cyber-attacks and related threats, the resilience in connection with the use of third-party service providers, and the implementation and stress testing of tolerance thresholds relating to critical business services. Particularly latter issue will be of key relevance; as a consequence, the PRA announces to closely review the „appropriateness of impact tolerances, the identification of dependencies, as well as robustness of testing plans“.
(3) Financial risks arising from climate change: One of the key areas of focus, so the PRA, will be the supervision of insurance and reinsurance undertakings with respect to the management of financial risks arising from climate change. In this context, the PRA expects firms to comply with its Supervisory Statement (SS3/19) entitled „Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change“ and announces upcoming thematic reviews and „firm-specific deep dives“.
(4) Regulatory changes: The PRA plans to implement some of the reforms announced in November 2022 to ease burdens on insurance companies particularly with respect to their reporting requirements and internal model review process. Additionally, the PRA announces some upcoming consultations, e.g. for the review of the current stress testing framework or the technical issues that were identified in its Solvency II review. Finally, the regulator also plans to start a consultation on a policy statement regarding „Diversity, Equity, and Inclusion“.
As these are only the key priorities of the PRA for 2023, please consult the original Dear CEO Letter for more detailed, comprehensive information.