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Work with insurers? The PRA wants these improvements

24 January 2020: the PRA has set out the practical improvements the regulator wants to see from the general insurance industry in its letter to Chief Executives of general insurance firms regulated by the PRA. Some topics are more familiar than others, says ICAEW’s Financial Services Faculty; but, interestingly for a prudential regulator, there is a firm emphasis on culture.

1. Watch out for tensions within the Senior Managers and Certification Regime

The letter highlighted ‘anecdotal concern’ that commercial pressures have been causing actuarial judgements to be disproportionately challenged in order to obtain certain results. This could include recognising expected benefits quicker than expected downsides. Boards and management must be ‘vigilant’ about this. The issue is exacerbated at some firms by a lack of transparency about judgements, a lack of communication between business and control functions and inadequate management information to redress the balance. Senior Management Functions need to be aware of, and clear on how they take action to mitigate these risks. 

2. Remember the future might not look like the past 

As firms are encouraged to focus on underwriting conditions and exposure management, the regulator points out: ‘Some key perils may be changing in their nature, frequency or severity’ as well as a need to refine their approaches to man-made catastrophe risk. These mean that the future may not look like the past, and reliance on traditional models and assumptions may not be sufficient to managing risk. For new and emerging areas of risk such a cyber risk firms need to address ‘silent’ or ‘non-affirmative’ exposures.

3. Speak up about bullying, harassment and bad behaviour

When it comes to non-financial misconduct, firms have been starkly warned that it won’t just be the Financial Conduct Authority coming after you. A key aspect highlighted was heads of control functions having access to non-executives In our report Culture and purpose in financial services there are practical suggests about how to empower staff to speak up, including tacit disincentives created by organisational structures and activities like ‘skip level meetings’.

4. Get to grips with data

One of the themes coming out of the PRA’s supervisory work has been data quality issues. This is by no means unique to general insurers, nor the causes, including legacy systems and insufficient controls around initial capture. This leads to time and resource being spent on cleaning data rather than analysis data. Firms should at the very least be aware of the time being taken on data cleaning, and have a plan to reduce this so as to facilitate the ability to make high quality decisions more rapidly.