Future of Insurance Regulation Up at FSA’s, BoE’s Paper

Jack Humphrey, Regulatory journalist
June 21, 2011 /

The Bank of England and the Financial Services Authority have set out the current thinking on how the future Prudential Regulation Authority (PRA) will approach insurance regulation once it formally replaces the FSA.

The Treasury previously proposed to institutionalize the PRA as an independent Financial Policy Committee (FPC) in the Bank of England, and another business regulator, the Financial Conduct Authority (FCA), which was formerly provisionally titled the consumer protection and markets authority.

In a joint paper called “The Bank of England, Prudential Regulation Authority – Our approach to insurance supervision”, the FSA and BoE set out specific insurance objectives and a distinct approach to insurance regulation for PRA, recognizing that the risks posed by insurers are different from the other firms it will supervise.

Similarly, in a recent joint paper issued last month, the FSA and BoE also set out the current view on how the PRA will approach the supervision of banks, building societies, credit unions and investment firms.

The PRA will be responsible for the prudential supervision of over 2,000 firms, of which around half will be deposit-takers while the others will be insurance companies. On current data, it will regulate 157 UK-incorporated banks (of which over 60% form part of overseas banking groups), 48 UK building societies, 652 UK credit unions and 162 branches of overseas banks, split roughly equally between the European Economic Area (EEA) and elsewhere.

Hector Sants, FSA chief executive and PRA chief executive designate, said: “In setting out the PRA’s approach to insurance supervision, we have looked closely at the lessons arising from previous episodes of insurance company distress.

“Reflecting the uncertain nature of insurers’ liabilities, prudential insurance regulation will be forward-looking and judgement-based. Much of the PRA’s proposed approach will be achieved in practice through the application of Solvency II, the new European framework for insurance supervision.”

Julian Adams, FSA director of insurance, added: “We recognise that the nature of insurers’ business models exposes them to a different set of risks than banks. The PRA’s regulation of insurers will seek to promote the safety and soundness of insurers to deliver two aims: to secure appropriate protection of policyholders and to contribute to the stability of the system.

“The PRA will concentrate its resources and actions on those insurance firms and issues that pose the greatest risk to its objectives. The risk assessment framework for insurers will explicitly take into account the need to protect policyholders, the various risks to which insurers are exposed and the different way in which insurers can fail.”

Andrew Bailey, FSA director of UK banks and building societies and PRA deputy chief executive designate, commented: “Insurance companies can in some circumstances pose risk to the stability of the financial system – via a range of channels, including as providers of funds to banks. The insurance supervisors will work closely with the Financial Policy Committee, who will assess system-wide risks.”

The joint paper was presented and discussed at a conference in London last June 20 for CEOs and senior managers of insurers that will come under the PRA’s supervisory control.

In July 2010 the Government issued a consultation document on proposed changes to the UK regulatory framework.

On 17 February, the government published a document that provided more details about its proposals to disband the FSA and establish a new system of more “specialized and focused financial services regulators,” namely the FPC, PRA, and FCA.

 

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