The PRA Business Plan was released in early May and sets out their workplan, strategy and budget for the 2023/24 period of activity. As a key public statement from the Regulator, its importance in understanding the focus for the coming year sits alongside the earlier statement on Supervision Priorities issued in ‘Dear CEO’ letter form back in January. In that sense therefore, there should be no great surprises for insurance companies – but the recent challenges facing the banking sector prove that nothing stays the same for long and in his foreword, Chief Executive Sam Woods is very quick to reference the issue facing banks and equally as quick to talk about the need not to take the resilience in the UK banking and insurance sectors for granted.

Therein perhaps is the first element of reading between the lines – the PRA is concerned about current turmoil in financial markets and most certainly does not see the risks that arise as being solely the concern of the banking sector.

The second key point to note is that Sam Woods is expecting to have a new secondary objective to facilitate international competitiveness given to the PRA under the Financial Services and Markets Bill “very shortly”. The Bill is currently still in the House of Lords, but the expectation is clearly for it to become law very soon.

The 2023/4 PRA Business Plan – Strategic Priorities

The PRA has articulated four key strategic priorities for the coming year:

1. Maintain and build on the safety and soundness of the banking and insurance sectors and ensure continuing resilience.
2. Be at the forefront of identifying new and emerging risks, and developing international policy.
3. Support competitive and dynamic markets, alongside facilitating international competitiveness and growth, in the sectors that it regulates.
4. Run an inclusive, efficient and modern regulator within the central bank.

The first 3 are very much external issues to address, but the fourth one will be more internally focussed, albeit an area where financial services firms can expect new regulatory controls themselves, with a Consultation Paper on Diversity in Financial Services expected to be published in H1 2023, followed by a Policy Statement in Q4 2023 or Q1 2024. Perhaps the PRA is simply getting that aspect of its own house in order ahead of setting expectations for the firms it regulates.

PRA Key Activities

The PRA has set out the key activities it intends to focus on to deliver on its strategic objectives. These are:

1. Financial Resilience, through the implementation of the Solvency UK reforms, with the measures introduced including:
   • significant streamlining of the rules for internal model approvals,
   • widening the range of assets that are eligible for the matching adjustment,
   • reduction to the risk margin,
   • enabling firms to apply voluntary add-ons to the fundamental spread (FS) applied to the assets held in their matching adjustment portfolios,
   • setting clear expectations on how the relevant senior manager(s) should approach making the required attestation concerning the adequacy of the FS and level of the resulting matching adjustment (MA), and
   • raising the threshold at which firms are required to enter the Solvency UK regime.
2. The creation of an Insurer Resolution Regime to help facilitate swift action in the event there is a need to manage and stabilise an insurer that is failing or likely to fail.
3. Continuation of its work on Insurance Stress Testing, with the announcement of the timeline for the next insurance stress test due in H2 2023.
4. Reinsurance risk in the life market arising from the potential offshored counterparty concentration of risk.
5. The impact of claims inflation that is occurring as a result of the general inflationary pressures currently prevailing.
6. The ongoing process of implementing its work on Operational Risk and resilience, including critical third parties and cyber stress testing, where the PRA will be working with the FCA to assess the progress made by firms. Firms should expect to be asked to respond to requests for information on the work carried out so far and in working towards the next deadline of March 2025. A major change will be the bringing of certain ‘Critical Third Parties’ under the regulatory umbrella.
7. Governance and risk management, where the key changes may primarily affect banks but a commitment to remove and streamline remaining elements of EU law may see as yet unspecified further changes for insurers too.
8. Senior Managers and Certification Regime (SM&CR) reforms, which were announced a few weeks ago, working alongside the FCA and HM Treasury to collate feedback in advance of likely reform proposals being published later in 2023.
9. Diversity and Inclusion – as mentioned earlier, with the PRA seemingly making getting its own house in order on this front a key priority, it should be no surprise it expects regulated firms to act too. A Consultation Paper is expected very soon.
10. Digitalisation, Artificial Intelligence and Machine Learning, which present both risks and opportunities for the PRA and regulated firms. It is an area in which the PRA is investing rapidly. A particular area of interest is new start-ups with novel ways of using technology. If you are in the process of creating such a business, we strongly advise that you consider the regulatory implications at an early stage, recognising that the regulator has indicated it is willing to adapt its approach in the event it feels firms are acting in a way that is inconsistent with its objectives, if not its (current) rules. The PRA also continues to work on its own approach to the use of data and technology, and the way it collects and uses data from regulated firms.

    Those firms operating in the London Market should consider this aspect alongside their approach to the Blueprint Two reforms to ensure they have a cohesive approach to modernisation. If you would like to know more, do take a look at the webinar recording from our recent seminar on the subject: “London Market Reform – Why Embracing BluePrint Two Makes Sense”

11. Climate change, which is an area where the PRA recognises many firms have taken action, but it appears to feel the risks have perhaps been underestimated by many, with the statement that “while some firms have made considerable progress, the level of embedding varies, and the PRA’s assessment is that further progress is needed by all firms.”

The last aspect of the activities planned by the PRA centre around its new proposed secondary objective to facilitate competitiveness and growth. The Financial Services and Markets Bill will give the PRA more control over the regulatory requirements it is responsible for and there is likely to be lots of technical changes as remaining elements of EU law are removed and replaced. Work is also planned to help ease entry to the market for new firms and the approval process for senior managers, with Sam Woods also saying:

“Internally, a major focus this year will be improving the operational efficiency of processing regulatory transactions, in particular in relation to senior manager approvals where we have been too slow.”

Temporary Permissions Regime

A reminder for firms that this will close before the end of 2023 and any firms that have not had their applications approved may be required to enter supervised run-off. If you are still seeking authorisation through this process, you should review your plans to ensure they can be delivered.

Conclusion

For any business, certainty is a major factor in successful business planning and the management of risk, and it is pleasing to see that what we are getting from the PRA is a consistent approach that recognises this need. The PRA has responded to some of the major challenges currently facing our industry and society, but in a way that should be consistent with the work any prudent insurance firm would already be undertaking.

The Solvency UK reforms have been well sign-posted now and firms should be well advanced with their own planning to implement these changes.

There may be no major surprises here – except perhaps the fact that the PRA feels it can deliver on everything it intends to do with a reduced budget – but it is certainly pressing the accelerator on its activity and in full steam ahead mode. Interestingly though, we have not seen any discussion in this Plan of the policy we see the PRA seeking to implement, which looks to reduce the level of reinsurance which certain insurers may be permitted to purchase. It seems to be a market wide policy which is being applied with the aim of increasing the net retention of insurers. An impact of this will potentially be greater capital requirements for firms which are having to lower their reliance on reinsurance, but it is not clear that it will also automatically and directly lead to greater financial resilience. Perhaps with a great retention of risk, the intention is that firms will be more prudent in their underwriting and pricing, which could of course lead to pricing increases.

If you would like to discuss any aspects of the PRA plans for the coming year, please do speak with the author, or your regular contact at ICSR.