On 5 November 2019 the PRA published a new ‘Dear CEO’ letter summarising their priorities for the general insurance sector for 2020. The priority areas of focus for the months ahead include:
- reserve adequacy and associated governance and controls;
- discipline in underwriting strategies, remediation activity and controls;
- emerging risk trends and exposure management practices;
- UK retail general insurers’ responses to the FCA’s pricing practices review; and
- ensuring firms develop and maintain a culture where staff can raise concerns, with effective mechanisms in place to support them in doing so.
The PRA has also published on the same day a ‘Dear Chief Actuary’ letter which provides some further detail on reserve adequacy.
Reserving adequacy, governance and controls
The PRA has indicated that there could be a growing risk of reserving deficiencies in some lines of business. This is seen especially in some US casualty lines such as financial and professional lines, medical malpractice and general liability classes.
Other areas of concern include regular over-optimistic assumptions; underwriting claims and reserving trends not being identified and acted upon; poor data and inadequate management information and transparency at board level when deciding reserve levels. The Annex to the letter explores other broader areas related to reserving that will be of general interest to senior management teams and boards.
Reserving will be an important area of supervisory focus over the coming months especially for firms with material exposure to long-tail casualty lines, firms with a poor history of reserving developments compared with initial assumptions, and firms with sudden growth. The PRA has set out its intentions to challenge management to justify material reserving assumptions; work with Lloyd’s on the adequacy of reserving positions for Lloyd’s syndicates; use S166 skilled persons to provide an independent view on the adequacy of individual firms’ reserving governance; challenge firms on whether they have sufficient reserving risk built into their internal models; and consider the use of further supervisory responses, including use of formal powers, where a firm’s reserving positions may be insufficient.
The letter also outlines the PRA’s observations on its recent work on underwriting. The PRA notes that since last year some firms have faced large losses with unexpected risk characteristics. Some firms are not achieving underwriting profitability and not completing remediation work to counteract potential under-pricing of risk. The PRA’s supervisory work will continue to expose weakness in underwriting controls which affect firms’ handle on profitability and exposures. The PRA will expect firms to show that they are adjusting underwriting strategies, risk appetites and business plans when addressing material control weaknesses.
The PRA notes that in light of recent natural disasters there is a need for firms to assess the adequacy of their exposure management data and controls, and risk mitigation strategies. Firms are encouraged to check whether their historical information and models are still representative of current hazards and exposure trends.
Over the coming months, the PRA plans to undertake a sample review of firms’ exposure management approaches in order to consider how adequate firms’ aggregated risk quantification is having regard to the changing nature of natural and man-made disasters.
Culture and support for control functions
The letter refers to recent reports relating to sexual harassment and bullying in the London market. The PRA suggests that non-financial misconduct has relevance for a person’s integrity and may affect their view of the fitness and propriety of that person within the Senior Managers and Certification Regime (SM&CR). The PRA will continue to work alongside the FCA to consider instances of inappropriate culture and conduct that may affect firms’ compliance with regulation, standards and statutory objectives.
The PRA believes that these issues of conduct have bearing on whether firms are fostering appropriate cultures where staff are able to discuss poor practices or unidentified risks within their organisations.
Boards have a responsibility to ensure a culture of prudent management of their firms and create an environment where control functions can assist them in fulfilling this duty. In particular, senior management should be alive to the risks of putting inappropriate pressure on individuals to deliver results in a challenging market.
Next steps for PRA/firms
The above five priority areas will be the PRA’s focus over the coming months. Firms are encouraged to assess these areas and consider whether the issues raised are relevant to them. The PRA expects that firms discuss the letter at the board to identify what actions should be taken to address any issues. The PRA will contact firms over the coming months to discuss the issues raised in the letter.
The letter can be read in full here.