This week, the PRA set out its regulatory priorities for 2023 in its latest “Dear CEO” letter. This briefing summarises: what those 2023 priorities are; how they have evolved from 2022; and the steps insurers should be taking to address them.
Overall, the 9 focus areas from this year’s Dear CEO letter build on the regulatory priorities from a year ago.
- Five priorities have carried over from 2022 and there are four new focus areas.
- Eight of these are directly relevant to General Insurers. The ninth, reinsurance risk, is primarily relevant for life insurers.
- All but one of the 2022 priorities have been carried over. Authorisation of third country branches was a priority last year, but has now been absorbed into other focus areas.
In addition, the PRA notes that it is making changes to its supervisory approach, including to reduce the number of categories for firms from five to four. There are also potential further changes coming, given the expectation for the UK Government to expand the PRA’s remit to include growth and competitiveness.
What are the PRA’s 2023 priorities?
Priorities carried forward from 2022:
| Priority area |
Key points from the Dear CEO letter |
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Financial resilience
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- Ongoing uncertainty around future economic and social inflation means that insurers should continue to allow for this within pricing, reserving, planning and capital modelling.
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Implementing financial reforms
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- The PRA will be working to implement aspects of Solvency II reform over the coming year, and will engage early with affected firms. There is also an expectation of wider scale reform as recently announced by the UK government.
- The PRA has committed to the smooth and orderly authorisation of branches of international insurers. The expectation is that branches currently within the Temporary Permissions Regime will be assessed within the year.
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Operational resilience
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- The PRA will continue to assess firms against the requirements of SS1/21, and is expecting firms to have already identified and mapped their important business services and set impact tolerances.
- Firms will need to demonstrate they can operate within tolerances under severe but plausible scenarios, including cyber attacks.
- Particular focus on robustness of outsourcing arrangements and third-party risk management.
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Financial risks arising from climate change
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- The PRA will continue to assess insurers' progress in meeting requirements of SS3/19.
- Climate risks are likely to continue to grow and evolve in future as the impacts of climate change crystallise.
- Acknowledgement that not all firms have met SS3/19 requirements, but expectation that firms demonstrate they are taking steps towards meeting regulatory expectations and addressing barriers to progress.
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Diversity equity and inclusion
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- Plans to consult on a regulatory framework for DEI.
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New priorities for 2023:
| Priority area |
Key points from the Dear CEO letter |
|
Risk management
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- PRA key focuses are robustness of risk management and control frameworks, with a particular focus on credit and counterparty risks.
- Firms should evolve and improve model risk management and validation, given market conditions are materially different to those prevailing when models were developed. The PRA encourages firms to learn from the CP6/22 consultation in the banking sector.
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Ease of exit for insurers
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- Focus on insurers’ resolution plans. Many firms have not reviewed these to reflect recent market conditions.
- Signposting of likely consultation to help simplify these requirements for smaller firms.
- Additional focus on performing appropriate due diligence in support of portfolio transfers.
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Non-natural catastrophe risk
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- Modelling and exposure management capabilities for non-natural catastrophe risk (including cyber) remain immature, and are becoming an increasing area of risk as London Market business shifts towards casualty business.
- The PRA plans to work with the industry to enhance practices and better manage risk.
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Key actions for general insurers
There are a wide range of steps that general insurers should be taking to ensure that they meet regulatory expectations over the coming year. Key action areas for actuaries and risk functions include:
If you would like to know more about any of the regulatory themes in the latest Dear CEO letter, please get in touch.
