From modelling to competition, John Mongelard picks out the highlights of Sam Woods’s insurance supervision update.
Over 200 people packed into London Business School to hear Sam Woods, CEO of the Prudential Regulation Authority (PRA), give an update on its approach to supervising the 600 UK insurers. There were a number of bankers there which is a reflection of Woods’s pull. A banker rightly called out the potential for financial stability issues if the main buyers of bail-inable bank debt are insurers. So who will be holding the baby the next time the banks get in trouble? The asset reporting rules are thankfully onerous, it was noted, which would let the regulator identify very quickly any concentrations.
Insurance is complicated, so can we make it any simpler? The very existence of models was questioned by one delegate. For clarity, SII models are something we lead Europe on with 19 approved firms, considerably more than any other EU jurisdiction – the next biggest is nine. So it is highly unlikely, Woods said, that we will be getting rid of them. The PRA will, however, be looking at the model change process and trying to make it smoother and more efficient. Compared to banks, the model approval process is intense (“diligent, sceptical and rigorous”) but that is no accident. For insurers the regulator broadly has to accept the final number that comes out of the model, whereas for banks the PRA has greater latitude to look at stress-tests and apply add-ons to get back to the number you first thought of.
While the PRA also has to focus on policyholder protection, it is unclear whether this means all policyholders should be treated the same. The idea is consistent with the FCA’s recent mission consultation, which discussed vulnerable consumers. Woods agrees and said that David Rule, PRA executive director for insurance supervision, might be saying something on this later in the year. It will probably be fairly subtle, intuitive and focus on the PRA’s firm categorisation methodology (which is used to determine how the PRA applies its resources). Expect something effective in Q1 2018 at the earliest.
While Solvency II is supportive of loans, it is heavily penal and calibrated against securitisation. Does this make sense given loans are less liquid? At this point it is worth remembering that SII was built in the aftermath of the financial crisis where securitisations did not emerge with a glowing reputation. Woods offered some light and said that in “some cases, for some securitisations” the calibrations were perhaps not in the right place. He noted that Rule is looking at a framework for simple and transparent securitisations.
Another banker noted the SII matching adjustment (MA), which is designed to provide capital relief for long-term liabilities (annuities), being matched with long-term assets. This has led to annuity writers investing in equity release mortgages and infrastructure lending (healthcare, social housing and telecoms infrastructure). These markets are unquoted and felt increasingly to depend on insurers as investors. Woods was broadly in favour of matching long-term liabilities with long-term assets – where the firm has the right expertise. He offered to look closer at equity release.
The PRA’s secondary objective invites it to look at competition in UK markets. So if we had over 100 firms competing on price and each had a similar market share then that would be that. But the challenge is also upon us to ensure the UK is competitive (internationally) and not just in the plurality of its markets. This was an issue the Treasury Select Committee had written to Woods on. He noted the PRA will be erring on the side of more competition where possible but the statutory objectives remained and the regulator need only be minded to consider competition. UK competitiveness was not yet a matter that had been codified into statute as a PRA objective.
On SII, Woods set out his concerns. It was too complex, the Solvency Capital Requirement limited the regulator’s hand, the Risk Margin was too sensitive and the Matching Adjustment could be more flexible to include a wider range of assets. Post Brexit these may be areas where we see some manoeuvring.