Insurance priorities in the PRA’s 2024/2025 Business Plan

What does this mean?

Priorities for insurers

The PRA confirms that as part of the Solvency UK (SUK) reforms, it will publish its final policy on the matching adjustment (MA) in June 2024, and the majority of these reforms will take effect at the end of June. Further to feedback in CP19/23, in 2024 the PRA will consider additional reform of the MA in the form of ‘sandboxes’. This would allow the self-certification of eligibility, or a route to further expand eligibility in response to innovations in primary financing markets. 

With regards to SUK reporting reforms, the PRA states it will publish a finalised single taxonomy package in Q2 2024, which will encompass earlier proposals. Additionally, the PRA will publish a consultation in H1 2024 setting out how it will transfer remaining Solvency II requirements from assimilated law into the PRA Rulebook and other policy material.

The PRA will publish the 2025 life insurance stress test approach document this year, which will include an exploratory scenario to assess exposure to the recapture of funded reinsurance contracts. It will later publish the individual results of the largest annuity-writing firms to strengthen market discipline. 

For general insurers, the PRA will run its first dynamic stress test in 2025.This test will involve simulating a sequential set of adverse events over a short period of time. The results of this exercise will be disclosed at an aggregate industry level.

Further to previous concerns raised by the PRA on internal model drift, the PRA will address perceived systemic trends that may weaken the robustness of models used across the market. The PRA also plans to consider model drift within individual firms to improve the effectiveness of model validation, so that firms can identify and address potential challenges themselves. 

The PRA intends to finalise its policy expectations for UK life insurers that use funded reinsurance arrangements. The PRA flags that firms will be expected to place limits on their funded reinsurance activities to ensure sound risk management. Further to CP2/24, the PRA also plans to publish its final policy on solvent exit planning in H2 2024. 

Further to the June 2023 Dear Chief Actuary letter, the PRA expects a continued lag in the emergence of claims inflation in data, which leads to potential excessive optimism with respect to reserving, pricing and capital and reinsurance planning. The PRA will continue to monitor this risk. Additionally, monitoring and assessing cyber underwriting risk will be a core PRA supervisory focus, particularly with regards to firms with material exposures.

The PRA will build on liquidity risk management expectations and develop liquidity reporting requirements for insurers most exposed to liquidity risk. The PRA will also focus on the effectiveness of insurers’ credit risk management capabilities and seek further assurance that firms’ internal credit assessments are appropriate. The PRA will provide feedback on a firm-specific or thematic basis. 

The PRA will consult on a package of reforms to the UK insurance special purpose vehicle regime, which among other things will allow a wider range of transaction structures in the UK regime. 

Cross-sectoral priorities

The PRA will monitor and assess firms’ ability to manage cyber threats and engage with firms on their execution of large and complex IT change programmes. 

Further to the regulators’ operational resilience policies, the PRA will assess firms’ ability to deliver important business services within impact tolerances by March 2025. The PRA also confirms it will publish its final policy on operational resilience with regards to critical third parties this year. 

On diversity and inclusion the PRA explains that following CP18/23, it is assessing responses and will provide an update in due course. Additionally, the PRA plans to consult on changes to the Senior Managers and Certification Regime in H1 2024.

Identifying risks and developing international policy

The PRA will continue to collaborate with international bodies / forums on international policy. For example, the PRA will continue to work with the International Association of Insurance Supervisors (IAIS) on its finalisation of the Insurance Capital Standard and Insurance Core Principles.  

The PRA confirms that in 2024 it will commence work to update its Supervisory Statement on managing climate-related financial risks. 

The PRA will continue to take a proactive approach to digital innovations though its insurer start-up unit. It will also continue to contribute to international digitalisation standards through the IAIS Fintech Forum.

What do firms need to do?

Financial resilience continues to be a key focus for the PRA. Insurers can expect to have their risk management frameworks scrutinised, in areas such as internal model validation, use of funded reinsurance to support bulk purchase annuity transactions, and claims inflation assumptions used to make key decisions, such as on reserving. 

SUK reform will be taking effect this year. And while, among other things, reform is expected to result in a release of capital, it will also give the PRA new powers to hold Senior Managers to account for the decisions they make. Senior Managers will want to ensure they understand any increase in the scope of their roles as a result of SUK reform, including increased accountability.  

The insurance priorities the PRA set out in its business plan are generally aligned to the insurance priorities it set out in its January 2024 Dear CEO letter (see our At a glance on this letter). Firms should consider both documents, along with the FCA’s recent business plan to understand the evolution of the UK’s regulatory agenda. Firms should assess how the regulatory agenda is reflected in their own firm-wide priorities and work plans for the coming year. 

The breadth of the topics covered in the PRA’s business plan demonstrate the fullness of the PRA’s regulatory and supervisory agenda over the year ahead. On financial risks arising from climate change for example, firms should ensure they have fully embedded the consideration of the financial risks from climate change in their governance arrangements, and into existing financial risk management practice. 

Data and technological capabilities will also be vital in meeting the PRA’s expectations in areas such as operational resilience (to enable them to monitor the delivery of their important business services within their impact tolerances by March 2025) and climate-related financial risks (to allow them to assess their clients and counterparties’ exposure to these risks).