The key areas of focus in 2024 will be:
The economic environment remains challenging and a particular area of focus of the PRA will be the effectiveness of firms’ credit risk management capabilities. In particular, the PRA will want assurance that firms’ internal credit risk assessments appropriately reflect the risk profile of their asset holdings and will assess their current and forward-looking validation plans and approaches.
Previous economic shocks (such as the Liability-Driven Investment shock in September 2022) meant the PRA had to quickly gather data on firms’ positions and exposures. To help the PRA in future to assess liquidity risk exposures in a timely and consistent manner, it plans to develop liquidity reporting requirements.
The PRA will conduct an exploratory system-wide exercise (SWES) in 2024 and will publish its findings at the end of the year. The PRA will engage with industry to prepare for the general insurance stress testing and life insurance stress testing in 2025.
Firms are reminded that by no later than March 2025, they should be able to demonstrate that they can remain within the impact tolerances for all their important business service. Boards and senior management are expected to actively oversee the delivery of their firms’ operational delivery programme.
Ease of exit
As previously announced in the Regulatory Grid published in November 2023, the PRA will be consulting in early 2024 on requirements for insurers to prepare plans for an orderly solvent exit.
The PRA will be publishing policy statements in relation to CP12/23 (Review of Solvency II: Adapting to the UK insurance market) and CP19/23 (Review of Solvency II: Reform of the Matching Adjustment). Legislative changes to the risk margin requirements came into force at the end of December 2023 and the PRA expects the rules changes to the matching adjustment to come into effect at the end of June 2024. All remaining rule changes should take effect by the end of 2024.
Climate-related financial risks
The PRA will assess firms’ progress in managing climate-related financial risks and expects firms to increase their effort to comply with Supervisory Statement 3/19 (Enhancing banks’ and insurers’ approaches to managing financial risks from climate change). The PRA will start work to update SS 3/19 in line with effective practice and developments in wider regulatory thinking.
The PRA anticipates that with the Solvency UK reforms and expected growth of the bulk purchase annuity market, life firms will continue to invest in a wider range of credit risky assets. The PRA expect firms to ensure that their strategic choices and investment decisions are made within their own risk tolerances. The PRA published on 16 November 2023, CP24/23 – Funded Reinsurance which sets out the PRA’s expectations in respect of life insurance firms entering into or holding funded reinsurance arrangements as cedants (to be contained in a new supervisory statement). The consultation closes on 16 February 2024 and implementation is expected to be in H1 2024. The PRA will continue to monitor developments and keep under review whether there is a need for further policy measures.
Cyber underwriting risk – the PRA will focus on ensuring that firms’ capital and exposure management capabilities match the growth in their cyber risk exposure.
Claims inflation – the PRA’s thematic review in 2023 showed that there remains material uncertainty and the potential for excessive optimism to impact reserving, pricing, and reinsurance planning by firms. The PRA will continue to monitor claims inflation through regulatory data collection and will consider if further targeted work is needed.
Model drift – In its 2023 model drift analysis the PRA identified a number of issues across internal model firms in the non-life sector. The PRA will continue to monitor the appropriateness of internal models and follow up with firms identified as exhibiting model drift.
Authored by Kirsten Barber.