## 1gbrea2022010 ## Source details **Canonical URL:** [1gbrea2022010](https://www.imf.org/-/media/files/publications/cr/2022/english/1gbrea2022010.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1gbrea2022010.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1gbrea2022010.pdf.json) --- ### EXECUTIVE SUMMARY — Major findings and overall observance - Regulatory framework described as "sophisticated" and authorities "leaders in supervisory techniques." - ICP observance: Observed (17); Largely Observed (6); Partly Observed (1); Not Observed (0). Total: 24. - Assessment period: June 2021 to November 2021. ### Insurance sector size, structure, and trends - Market ranking and scale: - "the fourth largest insurance market globally." - Size of insurance sector: "129 percent of U.K. GDP" (end-2020). - Gross written premiums (2020): GBP 271bn. - Penetration and density (2020): - Life insurance penetration: 8.8 percent. - Advanced markets life insurance penetration: 4.2 percent. - EU life insurance penetration: 3.6 percent. - Life insurance density: US$3,574. - General insurance penetration: 2.3 percent. - General insurance density: US$949. - Market structure and trends: - Number of authorized insurers declined from 465 (end-2016) to 370 (end-2020): 126 life insurers and 221 general insurers (end-2020). - Since 2016: growth muted; consolidation and restructuring; 21 new insurers licensed 2016–2020 (mostly general insurers and ISPV). - Expected TPR-related applications: approximately 140 EU insurers expected to apply for U.K. authorization by December 31, 2022. ### Concentration, products, and key statistics - Life sector concentration: - Top 3 life insurers: 39 percent of assets. - Top 10 life groups: 75 percent of assets. - Non-life concentration: - Top 3 companies: 63 percent market share. - Top 10 companies: 81 percent market share. - Lloyd’s: - Lloyd’s assets ≈ 50 percent of overall non-life sector assets. - Lloyd’s 2020 gross written premiums: 12 percent derived from U.K. market. - Life sector premiums (2020, GBP million): - Total gross written premiums: GBP 209,107 million. - Index-linked and unit-linked gross written premiums: GBP 124,025 million; Net written premiums: GBP 111,235 million. - Life reinsurance gross written premiums: GBP 31,990 million; Net written premiums: GBP 31,712 million. - Insurance with profit participation gross written premiums: GBP 6,113 million; Net written premiums: GBP 6,099 million. - Health insurance gross written premiums: GBP 1,913 million; Net written premiums: GBP 1,075 million. - Other life insurance gross written premiums: GBP 44,670 million; Net written premiums: GBP 27,887 million. - Total net written premiums (life): GBP 178,404 million. - General sector premiums (2020, GBP million): - Total gross written premiums: GBP 62,232 million; proportional reinsurance accepted: GBP 14,842 million; non-proportional reinsurance accepted: GBP 9,664 million; Net written premiums: GBP 59,900 million. - Selected lines (Gross direct / proportional reinsurance accepted / Net written premiums): - Fire and other damage to property: Gross direct GBP 19,188; proportional reinsurance accepted GBP 6,054; Net written premiums GBP 16,758. - General liability: Gross direct GBP 13,197; proportional reinsurance accepted GBP 2,352; Net written premiums GBP 10,574. - Motor (liability and other): Gross direct GBP 11,953; proportional reinsurance accepted GBP 2,420; Net written premiums GBP 10,539. - Retention rates: - Life business retained by primary insurers: around 85 percent. - Non-life business retention in the U.K.: around 69 percent. - Product composition: - Unit-linked gross written premiums: GBP 124bn of GBP 209bn total life gross written premiums (2020). - Unit-linked liabilities: 54.8 percent of total insurance liabilities (end-2020) and 55 percent of total insurance liabilities (end-2020) as stated elsewhere. - From 2016 to 2020, unit-linked liabilities increased by 17 percent; total insurance sector liabilities increased by 16 percent. ### Solvency framework, internal models, and capital implications - Solvency ratios and comparisons: - Weighted average SCR ratio hovering slightly above 150 percent since 2016. - EU life insurers’ SCR ratios: between 200 and 250 percent. - EU general insurers’ SCR ratios: around 250 percent. - Long-term guarantee measures’ quantified impacts (end-2020): - Matching Adjustment (MA) usage by 18 solo entities. - Without MA: value of technical provisions would be GBP 42bn higher (+3 percent). - Without MA: SCR would be higher by 44bn (+60 percent). - Without MA: eligible own funds to meet the SCR would be lower by 37bn (-32 percent). - Transitional Measure on Technical Provisions (TMTP) used by 22 firms. - Without TMTP: value of technical provisions would be GBP 27bn higher (+2 percent). - Without TMTP: eligible own funds to meet the SCR would be lower by 21bn (-18 percent). - Without TMTP: SCR would be higher by 3bn (+4 percent). - Use of internal models: - Less than "20 percent" (alternatively specified as "18 percent" in places) of solo entities use a full or partial internal model. - Those using internal models represent "around 80 percent" (alternatively "79 percent") of the sector by assets. - Average capital reduction from internal models: "around one quarter." - Market vs underwriting risk contribution to undiversified basic SCR: - Market risk: 68 percent. - Life underwriting risk: 16 percent. ### Stress testing and liquidity resilience - Top-down solvency stress test: - Covered "14 larger U.K. insurers" (around 70 percent of market). - Sector largely resilient, vulnerabilities from lower interest rates and equity price declines, particularly for life insurers. - Scenario insights: - Bond spread increases partly offset via MA. - Rising interest rates would benefit life sector by reducing liabilities. - For general insurers, rising interest rates combined with higher inflation would likely lead to earnings declines; tightening financial conditions scenario showed milder aggregate impact. - Scarring scenario (further COVID-19 deterioration): - Median life firm excess assets over liabilities declines by more than 15 percent. - Solvency ratios of two firms would drop below the 100 percent threshold. - Liquidity findings: - Analysis of five large life insurers: sizable upward shifts in interest rates would not cause systemic liquidity stress given current cash and liquid asset buffers, but cash buffers differ markedly across firms. - Life insurers largely resilient to variation margin calls in interest rate swap portfolios. - More granular liquidity data needed for annuity writers and insurers with large derivative holdings; PRA plans to obtain specific liquidity data. ### Timing and key transitions affecting the sector - FSAP occurred amid multiple transitions: COVID-19 legacy issues (Business Interruption and catastrophe claims), Brexit, Solvency II Review, Future Regulatory Framework (FRF) Review, LIBOR transition, and transition to IFRS 17. - IFRS 17: - Effective for annual reporting periods beginning on or after 1 January 2023. - Involves substantial overhaul of accounting systems for long-term contracts; resource intensive; supervisors advised to monitor implementation progress and ensure lagging firms do not divert resources from other critical projects and controls. ### Brexit, equivalence, and Future Regulatory Framework (FRF) - Post-Brexit market access: - U.K. insurers wishing to continue business in the EU either had suitable EU subsidiaries or needed to establish them. - EIOPA published recommendations to facilitate servicing of existing contracts not moved to EU-based subsidiaries. - EU decision on equivalence of U.K. framework: none made at assessment time despite regulatory framework being identical to EU framework. - FRF Review: - FRF Review 2021 Consultation published November 2021. - Some proposals beneficial; others require careful design to preserve FCA and PRA primary objectives and operational independence. - Recommendation: consider simplifying and streamlining legislative framework for insurance supervision to improve navigability. ### Solvency II Review and supervisory independence - Solvency II Review aims to better tailor framework to U.K. market and address post-2016 shortcomings. - Concern: technical elements (risk margin, matching adjustment design/calibration) embedded in legislation, limiting PRA policy judgment and public independence. - Recommendation: ensure HMT requests for PRA advice are transparent and PRA can provide independent, transparent advice; final positions should be consistent with ICS monitoring period ending in 2024. ### Macroprudential oversight and systemic reviews - Macroprudential supervision: Largely Observed with scope for enhancement. - FPC and deep dives: - FPC requests deep dives; last sectoral deep dive for insurance was in "2016." - Recommendation: regular PRA Insurance Directorate reporting on broad trends and a domestic process inspired by the IAIS Global Monitoring Exercise (GME). - Recommendation: BoE to undertake a deep dive on Lloyd’s and the London Market’s role and potential systemic relevance internationally (focus on substitutability and market share), cooperative with other supervisors. ### Crisis management, resolution, and insurer failure preparedness - Current tools and experience: - U.K. has used statutory exit strategies and PRA tools for small and medium firm exits; FSCS protected policyholders in several failures. - Experience since 2016: 61 general insurers and 29 life insurers exited via Part VII transfers; 25 general insurers and 8 life insurers exits related to Brexit. - Run-off market: ~20 firms acquiring run-off portfolios with technical provisions about GBP 3.5bn; 40 firms stopped writing new business with technical provisions GBP 8.5bn; 10 firms in insolvency proceedings with technical provisions GBP 3bn. - Gaps and legal powers: - No comprehensive insurer resolution regime in place; assessment: Partly Observed for insurer resolution powers. - Limitations include lack of clear group-level resolution powers, inability to write down liabilities pre-insolvency (section 377 constraints), limited powers to stay counterparties’ rights, no clear bridge institution power, and lack of explicit authority to secure continuity of essential services. - Proposed legislative changes (HMT consultation May 20, 2021): - Amend section 377 to allow write-down pre-insolvency, improve application process, and extend FSCS protection to pre-written-down amounts (apply to U.K. insurers but not Society of Lloyd’s). - Mission encourages proceeding with proposals. - Resolution planning: - Resolution plans being put in place for IAIGs but not all were in place at mission time. - Crisis Management Groups: in place for two of three IAIGs; expected the final one will be put in place "in the course of 2022." ### Supervisory approaches: PRA and FCA observations - PRA: - Supervisory approach: sophisticated, structured, judgement-based, forward-looking, risk-based and proportionate. - PRA regulates 138 life insurers and 245 general insurers. - Concerns: limited on-site supervisory activity targeted at business processes and frontline staff; deep dive reviews often focused on senior management and desk-based analyses. - Use of Section 166 skilled person reviews: - From 2017 to Q2 2021/22: 34 section 166 reviews for insurers. - Section 166 often used as substitute for PRA-staffed deep dives; mission recommends internalizing some skilled person work and increasing PRA on-site inspections. - Staffing: - PRA insurance supervision staff declined from "313 at the end of 2016 to 278 at the end of 2020." - PRA strategic review and 2026 strategy in progress; mission recommends increased on-site resourcing and exploring FSMA cost recovery options for PRA-resourced on-site inspections. - FCA: - Conduct regulator with strategic objective to ensure relevant markets function well; prudential regulator for solo-regulated firms and intermediaries. - Total FCA staffing: "approximately 3,629 full time equivalent staff" with "approximately 256 FTE working on supervision of insurers and insurance intermediaries." - Emphasis on portfolio supervision with some fixed firm supervision; recent reduction in fixed firm supervision in favour of portfolio supervision should be kept under review. - Recommendation: consider extending fixed firm supervision to all PRA Category 1 and 2 firms where incremental resource implications are minimal in overall FCA context. - Coordination: - For significant firms, insurance sector supervision optimized where PRA and FCA information sharing is amplified. ### Key supervisory statistics and frameworks - PIF (Proactive Intervention Framework): 5 stages (Stage 1 low risk to Stage 5 in resolution). - PRA firm categorisation: five categories (Category 1–5) based on potential impact; Category 1 defined as "very significant capacity" to cause disruption. - On-site vs skilled person activity: - Approximately 100 deep dive reviews 2017–2020. - 34 s166 skilled person reviews 2017–Q2 2021/22. - Authorizations and timelines: - Section 55V of FSMA: regulator has maximum 12 months to determine an application; 6 months to decide after application deemed complete. - Since 2016: 14 new insurers authorized by PRA and FCA; maximum in any one year: 4. ### Recommendations and areas for further work (selected) - Monitor IFRS 17 implementation progress and insurers’ resource allocations. - Ensure transparency mechanisms between HMT and PRA during Solvency II Review to preserve PRA independence in policymaking; final positions should be consistent with the ICS monitoring period ending in 2024. - Strengthen macroprudential monitoring: regular PRA reporting; consider domestic process modeled on IAIS GME. - Bank of England to undertake deep dive on Lloyd’s and London Market systemic relevance internationally. - Complete crisis management framework and develop comprehensive insurer resolution regime: - Put resolution plans in place for all IAIGs with greater group-level focus. - Adapt section 377 FSMA write-down power for pre-insolvency use, improve application process, and extend FSCS protection for pre-written-down amounts. - Establish Crisis Management Groups for all IAIGs. - Increase PRA on-site supervisory activity focused on business processes and frontline staff; internalize some s166 skilled person work and explore cost recovery under FSMA. - FCA to reassess balance between fixed firm and portfolio supervision; consider expanding fixed firm supervision to all PRA Category 1 and 2 firms where appropriate. - Enhance liquidity monitoring frameworks for annuity writers and insurers with large derivative holdings; collect more granular liquidity data and require IAIG liquidity risk management plans (CF16.9d alignment). ### Assessment methodology and scope - Assessment against ICPs issued by the IAIS in November 2019 and includes ComFrame standards where applicable. - Topical issues covered: Solvency II Review, FRF Review, supervision of climate risks, Brexit, LIBOR transition, transition to IFRS 17. - Assessment reflects laws, regulations, supervisory requirements and practices in place June to November 2021. - ICP rating definitions preserved as in source. *Source: IMF Financial Sector Assessment Program — Executive Summary and detailed assessment (content unit 1gbrea2022010).* ### EXECUTIVE SUMMARY ____________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Major findings and overall observance - The regulatory framework for insurance supervision in the United Kingdom is described as "sophisticated" and authorities are "leaders in supervisory techniques." - Observance with the Insurance Core Principles (ICPs) is very high: 17 ICPs observed, 6 out of 24 ICPs determined to be largely observed, and 1 partly observed. - The assessment was carried out from June 2021 to November 2021. ### Insurance sector size, structure, and trends - The United Kingdom insurance sector is highly developed and is "the fourth largest insurance market globally." - In terms of balance sheet assets, the size of the insurance sector amounts to "129 percent of U.K. GDP." - Since 2016: - Growth rates are muted. - The number of licensed insurers has significantly declined, indicating consolidation and restructuring. ### Solvency framework, models, and capital implications - Solvency ratios: - U.K. insurers’ solvency ratios have been "extremely stable" since Solvency II implementation and are well above regulatory thresholds but consistently lower than European peers. - Structural factors partially explain lower ratios; one example is the design of the GBP risk-free term structure which "makes more usage of market rather than extrapolated data than the Euro one." - Use of internal models: - Less than "20 percent" of solo entities use either a full or a partial internal model. - These insurers represent "around 80 percent of the sector in terms of assets." - On average, using an internal model results in capital savings of "around one quarter." - Use of Solvency II measures: - The Matching Adjustment (MA) and the Transitional Measure on Technical Provisions (TMTP) result in additional capital savings. ### Stress testing and liquidity resilience - A top-down solvency stress test covered "14 larger U.K. insurers" and identified vulnerabilities from lower interest rates and equity price declines, particularly for life insurers. - Scenario insights: - Increases in bond spreads are partly offset through the MA. - A scenario with rising interest rates would benefit the life sector. - For general insurers, rising interest rates combined with higher inflation would likely lead to earnings declines. - Liquidity findings: - Life insurers are largely resilient to variation margin calls in their interest rate swap portfolios. - Cash buffers at the group level differ markedly across firms. - A more comprehensive analysis that incorporates liquidity drains and reduced market liquidity for certain assets would require more granular data and a monitoring framework, especially for annuity writers and insurers with large derivative holdings. This should be considered in forthcoming liquidity plans. ### Timing and key transitions affecting the sector - The FSAP occurred during significant ongoing changes: COVID-19 legacy issues (Business Interruption and catastrophe claims), Brexit, the Solvency II Review, the Future Regulatory Framework (FRF) Review, the LIBOR transition, and the transition to IFRS 17. - IFRS 17: - Will involve a significant overhaul of insurers’ accounting systems, particularly for long-term insurance contracts. - It is resource intensive; supervisors should monitor implementation progress and ensure lagging firms do not excessively divert resources from other critical projects and day-to-day risk management and control functions. ### Brexit, equivalence, and Future Regulatory Framework - Post-Brexit arrangements: - U.K. insurers wishing to continue business in the EU either had suitable EU subsidiaries or needed to establish them. - EIOPA published recommendations supporting recognition/facilitation of continued servicing of existing contracts not moved to EU-based subsidiaries. - The EU has not made any decision on equivalence of the U.K. framework, even though it is currently identical to the EU regulatory framework. - Future Regulatory Framework Review (FRF): - The FRF will be important in defining objectives and responsibilities of regulators outside the EU system. - Some proposals in the latest consultation have benefits; others will need careful design to preserve FCA and PRA primary objectives and operational independence. - Consideration should be given to simplifying and streamlining the legislative framework for insurance supervision to make it easier for firms to navigate. ### Solvency II Review and supervisory independence - The Solvency II Review is underway and aims to better tailor the framework to U.K. market characteristics and address post-2016 shortcomings. - Concern: highly technical elements (e.g., risk margin and matching adjustment design and calibration) are embedded in legislation, limiting PRA space to make policy judgments independently and publicly. - Suggested approach: ensure HMT requests for advice from the PRA are transparent and that PRA can provide independent, transparent advice; any divergence between PRA advice and final policy would then be clear. ### Macroprudential oversight and systemic reviews - Macroprudential supervision could be enhanced via more structured and regular consideration of insurance sector macroprudential risks. - The Financial Policy Committee (FPC) requests deep dives, but the last sectoral deep dive for insurance was in "2016." - Recommendation: regular reporting from the PRA Insurance Directorate on broad trends and a domestic process inspired by the IAIS Global Monitoring Exercise (GME) could be appropriate and tied to qualitative input for the GME. - Given the U.K.’s global insurance role, the Bank of England (BoE) should undertake a deep dive review on the role and potential systemic relevance of Lloyd’s and the London Market, focusing on substitutability and market share and done cooperatively with other supervisors. ### Crisis management, resolution, and insurer failure preparedness - The U.K. has used statutory exit strategies and PRA tools to handle small and medium-sized firm exits; the Financial Services Compensation Scheme (FSCS) has protected policyholders in several failures. - Gap: less certainty about handling failure of a significant insurer or Internationally Active Insurance Group (IAIG) — a PRA Category 1 insurer. - Current status and recommendations: - The PRA and HMT acknowledge the lack of a comprehensive insurer resolution regime. - Resolution plans are not in place for all IAIGs; existing plans are constrained by legal-entity-level powers and would benefit from greater group-level focus. - The mission supports proposals to enhance the PRA toolkit, including adapting the write-down power in section 377 of FSMA to make it available before insolvency, improving application process, and extending FSCS to protect pre-written-down amounts. - Crisis Management Groups should be in place for all IAIGs. Currently these are in place for two of the three IAIGs and it is expected that the final one will be put in place "in the course of 2022." ### Supervisory approaches: PRA and FCA observations - PRA: - Approach is sophisticated, structured, and well anchored in statutory objectives. - Concern: lack of on-site supervisory activity targeted at business processes and frontline staff discussions. - Deep dive reviews often do not involve discussions with non-senior staff and may rely on desk reviews or section 166 skilled person reports. - Recommendation: increase and deepen on-site inspection activity, consider bringing some outsourced deep dives in-house, and explore cost recovery options for PRA-resourced on-site inspections under FSMA. - FCA: - Emphasis on portfolio supervision with some dedicated fixed firm supervision is viewed as an appropriate compromise for a conduct regulator. - FCA should continue reviewing its approach to fixed and portfolio supervision to ensure an effective risk-based approach aligned with business needs and industry developments. - The FCA’s recent reduction in fixed firm supervision in preference for more portfolio supervision should be kept under review; extending fixed firm supervision to all PRA Category 1 and 2 firms has minimal incremental resource implications in the overall FCA context. - For significant firms, insurance sector supervision is optimized where PRA and FCA information sharing is amplified. ### Recommendations and areas for further work (summary) - Monitor IFRS 17 implementation progress and resource allocations within insurers. - Consider transparency mechanisms between HMT and the PRA during the Solvency II Review to preserve PRA independence in policymaking. - Strengthen macroprudential monitoring with regular PRA reporting and potentially a domestic process modeled on the IAIS GME. - BoE to undertake a deep dive into Lloyd’s and the London Market’s systemic relevance globally. - Complete crisis management framework and develop a comprehensive insurer resolution regime: - Put resolution plans in place for all IAIGs with greater group-level focus. - Adapt the PRA write-down power (section 377 FSMA) for pre-insolvency use, improve its application process, and extend FSCS protection for pre-written-down amounts. - Establish Crisis Management Groups for all IAIGs. - Increase PRA on-site supervisory activity focused on business processes and frontline staff, and reassess use of section 166 skilled person reviews versus in-house inspections. - FCA to reassess balance between fixed firm supervision and portfolio supervision and consider expanding fixed firm supervision to all PRA Category 1 and 2 firms where appropriate. - Enhance liquidity monitoring frameworks, particularly for annuity writers and insurers with large derivative holdings, with more granular data collection and liquidity plans. ### Assessment methodology and scope - The assessment was made against the ICPs issued by the IAIS in November 2019 and includes ComFrame standards. - Topical issues covered: Solvency II Review, FRF Review, supervision of climate risks, Brexit, LIBOR transition, and transition to IFRS 17. - The assessment reflects laws, regulations, supervisory requirements and practices in place at the time of the assessment in June to November 2021. - ICP observance ratings defined as: - Observed: all applicable standards observed and supervisor has legal authority and exercises it satisfactorily. - Largely observed: only minor shortcomings exist. - Partly observed: shortcomings sufficient to raise doubts about ability to achieve observance. - Not observed: no substantive progress toward observance has been achieved. *Source: IMF Financial Sector Assessment Program — Executive Summary (assessment performed June to November 2021).* ### 18. The assessment necessarily focuses on the supervision and regulation of the largest ### 1gbrea2022010 - 18. The assessment necessarily focuses on the supervision and regulation of the largest ### Scope and focus of the assessment - Assessment concentrates on supervision and regulation of the largest insurers as these are of most concern from a financial stability perspective. - Prudential supervision assessment focused on the implementation of Solvency II. - Insurers not subject to Solvency II (termed “non-directive” firms) were not assessed; they: - account for 25 percent of authorized insurers, but a very small share of the U.K. market. - Only two non-directive insurers have substantial assets (combined £11 billion). - Other non-directive insurers represent £20 million of premium compared to an industry total of £270 billion and assets of approximately £200 million compared to an industry total of £2,564 billion. - Note: figures regarding non-directive insurers (other than the 2 with substantial assets) are highly approximate as they have no annual reporting obligation. ### Institutional framework, mandates, and coordination - Regulation model: dual-regulated insurers (PRA and FCA) under the United Kingdom’s “Twin Peaks” model. - Responsibilities: - PRA: prudential matters; general objective to promote the safety and soundness of PRA-regulated firms; insurance objective is “contributing to the securing of an appropriate degree of protection for those who are or may become policyholders”. - PRA’s secondary objective (SCO): to facilitate, insofar as reasonably possible, effective competition in the markets for services provided by PRA-regulated firms in carrying on regulated activities. The PRA’s SCO became effective in March 2014. The SCO only applies to the PRA’s exercise of general functions and does not require the PRA to act incompatibly with its primary objectives. - FCA: conduct regulator with a strategic objective to ensure relevant markets function well; operational objectives are to protect consumers, enhance market integrity and promote effective competition in the interests of consumers. The FCA is also the prudential regulator for solo-regulated firms and insurance intermediaries. - Quantities of regulated firms: - PRA regulates 138 life insurers and 245 general insurers. - FCA is the conduct regulator for about 51,000 firms and prudentially supervises about 49,000 of these firms which are solo-regulated firms. - Legislative and oversight context: - Parliament establishes legislative parameters; HMT sets the regulatory perimeter via secondary legislation. - The assessment incorporated ComFrame standards for IAIG group-wide supervision where applicable. ### Regulatory change drivers and ongoing reforms - Future Regulatory Framework Review (FRF) consultation may change PRA and FCA objectives, powers, and responsibilities; assessment is based on current laws and policies but includes recommendations for FRF to consider. - Solvency II Review is underway (see Box 1); PRA and HMT collaboration includes a QIS: - QIS conducted by the PRA between July and October 2021 (participation voluntary). - QIS focused mainly on: (i) calculation of the matching adjustment; (ii) the risk margin; and (iii) the Transitional Measure on Technical Provisions (TMTP). - PRA strategic review: - Undertaken over 1 year; report finalized during the FSAP mission. - Implementation comprises the PRA’s 2026 strategy with refinements to supervisory approach through to 2022 and organizational transformation through to 2026; changes from the strategic review are not in scope of this assessment. - FCA strategic move: - Transitioning to a more data-driven regulator and cloud technology to enable increased automation and data analysis; mission considered existing systems and processes only. ### Findings and observations on Solvency II Review (Box 1) - U.K. Government objectives for Solvency II Review: - to spur a vibrant, innovative, and internationally competitive insurance sector - to protect policyholders and ensure the safety and soundness of firms - to support insurers to provide long-term capital to support growth, including investment in infrastructure, venture capital and growth equity, and other long-term productive assets, as well as investment consistent with the U.K. Government’s climate change objectives. - Government observations from Call for Evidence responses: - many aspects of Solvency II are overly rigid and rules-based; - desire for a prudential regime that is more proportionate and flexible with a better mix of judgement and rules; - consensus that the risk margin is currently too high and too volatile in the low interest rate environment; - belief that reducing size and sensitivity of the risk margin would diminish incentives to reinsure longevity risk outside the United Kingdom and could free up resources and reduce balance sheet volatility; - view that matching adjustment application process needs to be proportionate to benefits and risks to allow flexible investment in eligible assets; - agreement that Solvency II requirements do not place disproportionate burdens on insurers regarding SCR calculation or model application processes. - Governance and independence notes: - Remit letters issued by HMT under Section 30B of the Bank of England Act 1998 are recommendations to the PRC but the Solvency II review remit letter elevates some aspects to objectives the review must meet, which may constrain PRA independence in rule-making for prudential policy. - PRA and HMT are working closely; PRA’s QIS is technical input and scenarios specified in the QIS do not represent reform proposals. - Industry reactions: - During the FSAP mission, industry expressed criticism of PRA’s calibration options for the matching adjustment and used HMT objectives to frame criticism, despite PRA statements to the contrary. ### Climate risk supervision and initiatives (Box 2) - U.K. authorities have been at the forefront since Governor Mark Carney’s September 2015 speech and the PRA’s Climate Change Adaption Report. - PRA published Supervisory Statement 3/19: Enhancing banks and insurers’ approaches to managing the financial risks from climate change. - Expectation that firms fully embed approaches to managing climate-related financial risks by end of 2021; PRA issued industry-wide feedback via a ‘Dear CEO’ letter on July 1, 2020. - Climate Financial Risk Forum (CFRF) established March 2019 with industry and regulator participation; published guides on June 29, 2020 and October 21, 2021 addressing disclosure, scenario analysis, risk management, and innovation. - BoE launched Climate Biennial Exploratory Study (CBES) in June 2021: - CBES explores three climate scenarios (early, late and no action) built on NGFS scenarios with a 30-year horizon, focusing on transition and physical risks; exploratory exercise aimed at understanding business model challenges rather than pass/fail. - FCA new disclosure rules aligned with TCFD: - Announced in December 2021 following a June 2021 consultation. - Rules for life insurers relating to assets managed or administered on behalf of clients/consumers took effect for the largest firms on January 1, 2022, and 1-year later for smaller firms (with over £5 billion in assets under management or administration). - Disclosures include: entity-level annual TCFD entity report to be published prominently on firm websites, and product-level disclosures requiring a core set of climate-related metrics for the firm’s portfolio and products. ### Industry structure and key statistics - Market size and rankings: - Globally, the United Kingdom represents the fourth largest insurance market. - Gross written premiums amounted to GBP 271bn in 2020. - Life insurance metrics: - Life insurance penetration (premiums to GDP) in 2020: 8.8 percent. - Advanced markets life insurance penetration: 4.2 percent. - European Union life insurance penetration: 3.6 percent. - Life insurance density (premiums per capita) in 2020: US$3,574. - General insurance metrics: - General insurance penetration in 2020: 2.3 percent. - General insurance density in 2020: US$949. - Balance sheet scale: - Size of the insurance sector amounted to 129 percent of GDP at end-2020, up from 111 percent at end-2016. - EU-27 insurance sector: 72 percent of GDP (comparison). - Market structure and trends: - Number of authorized insurers declined from 465 at end-2016 to 370 by end-2020: - By end-2020: 126 life insurers and 221 general insurers. - Market consolidation driven by low interest rates and Solvency II facilitating consolidation within groups. - Insurers leaving the market outnumbered new entries, particularly in general insurance as international groups reorganized in Europe. - 21 insurers were newly licensed from 2016 to 2020 (mostly general insurers and insurance special purpose vehicles). - An expected rise in licensed firms as EU insurers restructure: approximately 140 EU insurers which previously undertook business in the United Kingdom through passporting arrangements are expected to apply for U.K. authorization to continue undertaking U.K. business before the cut-off date of December 31, 2022. The PRA and FCA are processing these applications. *Source: IMF staff and U.K. authorities (content unit 1gbrea2022010).* ### 31. The concentration in the life insurance sector is moderately high but is very significant ### 31. The concentration in the life insurance sector is moderately high but is very significant ### Concentration and market structure - Life insurance concentration: - The three largest life insurers account for a market share of 39 percent in terms of assets. - The largest ten life groups account for 75 percent of assets. - Non-life (general) insurance concentration: - The three largest companies hold 63 percent of market share. - The largest ten companies hold 81 percent of market share. - Lloyd’s structure: - Lloyd’s is made up of multiple self-directed entities (Members and syndicates) rather than a single entity. - Lloyd’s assets represent almost 50 percent of the overall non-life insurance sector’s assets. - Lloyd’s 2020 gross written premiums: 12 percent derived from the U.K. market. ### Product composition and premium income (2020) - Life sector gross written premiums: GBP 209,107 million (GBP 209bn). - Index-linked and unit-linked insurance: Gross written premiums GBP 124,025 million; Net written premiums GBP 111,235 million. - Life reinsurance: Gross written premiums GBP 31,990 million; Net written premiums GBP 31,712 million. - Insurance with profit participation: Gross written premiums GBP 6,113 million; Net written premiums GBP 6,099 million. - Health insurance: Gross written premiums GBP 1,913 million; Net written premiums GBP 1,075 million. - Health reinsurance: Gross written premiums GBP 396 million; Net written premiums GBP 396 million. - Other life insurance: Gross written premiums GBP 44,670 million; Net written premiums GBP 27,887 million. - Total net written premiums (life): GBP 178,404 million. - General (non-life) sector gross written premiums (2020, GBP million): - Fire and other damage to property: Gross direct GBP 19,188; proportional reinsurance accepted GBP 6,054; Net written premiums GBP 16,758. - General liability: Gross direct GBP 13,197; proportional reinsurance accepted GBP 2,352; Net written premiums GBP 10,574. - Motor (liability and other): Gross direct GBP 11,953; proportional reinsurance accepted GBP 2,420; Net written premiums GBP 10,539. - Medical expense: Gross direct GBP 5,131; proportional reinsurance accepted GBP 1,055; Net written premiums GBP 5,631. - Marine, Aviation and Transport: Gross direct GBP 6,148; proportional reinsurance accepted GBP 2,022; Net written premiums GBP 4,817. - Other direct insurance: Gross direct GBP 6,615; proportional reinsurance accepted GBP 940; Net written premiums GBP 5,613. - Non-proportional reinsurance: non-proportional reinsurance accepted GBP 9,664; Net written premiums GBP 5,967. - Total general sector: Gross written premiums GBP 62,232 million; proportional reinsurance accepted GBP 14,842 million; non-proportional reinsurance accepted GBP 9,664 million; Net written premiums GBP 59,900 million. - Retention rates: - Around 85 percent of life business is retained by primary insurers. - Retention in non-life business in the United Kingdom is around 69 percent. ### Dominant products and risk transfer - Unit-linked products: - Unit-linked policies are the most important life insurance product by a wide margin. - Unit-linked gross written premiums: GBP 124bn of GBP 209bn total life gross written premiums in 2020. - Unit-linked liabilities account for 55 percent of total insurance liabilities (end-2020). - From 2016 to 2020, unit-linked liabilities increased by 17 percent; total insurance sector liabilities increased by 16 percent. - Other life lines: - With-profit life business generated GBP 6bn premiums (2020). - Life reinsurance gross written premiums: almost GBP 32bn in 2020. - Non-life lines (shares of gross premiums): - Property: 31 percent. - General liability: 21 percent. - Motor: 19 percent. - Non-life sector total gross written premiums in 2020: GBP 62bn. ### The Society of Lloyd’s: structure and solvency framework - Lloyd’s legal and market structure: - Lloyd’s is a statutory corporation (Lloyd’s Act 1871) and operates as a market of Members and syndicates. - Members provide underwriting capital and are liable only for their share of profits or losses. - Syndicate calendar years remain open for three years and are closed via Reinsurance to Close (RITC). - Corporation of Lloyd’s oversees market infrastructure, approves business plans and capital requirements for each syndicate, and monitors the Market’s risk profile. - Chain of security (three links): - First Link: Syndicate-level assets (premium trust funds, PTF). - Second Link: Members’ Funds at Lloyd’s (FAL) — ‘Several Assets’ held in trust for policyholders. - Third Link: Mutual Assets — Central Fund and Society of Lloyd’s Assets, Subordinated Debt and Securities, and a Callable Layer. - FAL and Member requirements: - Member FAL level based on syndicate capital requirement calculations allocated to Members. - Syndicate capital calculations use an ultimate view of risk with an uplift, typically 35 percent on base capital calculation. - Member FAL replenished annually in June (‘coming into line’) with flexibility for earlier recapitalization. - Requirements to maintain sufficient FAL are Lloyd’s requirements, not Solvency II regulatory requirements. - Central Fund: - Fund of last resource to safeguard policyholders if a member fails to meet liabilities. - Access at the discretion of the Council of Lloyd’s; members contribute annually; callable layer up to 3 percent of a member’s overall premium limits in any year. - Solvency metrics and models: - Lloyd’s has two solvency capital requirements: Market Wide Solvency Capital Requirement (MWSCR) and Central Solvency Capital Requirement (CSCR). - MWSCR reflects aggregate member losses and Central Fund losses; CSCR reflects Central Fund losses only. - Lloyd’s must ensure eligible own funds meet the MWSCR; centrally Lloyd’s must meet the CSCR. - Managing Agents calculate notional SCRs (uSCRs) for each syndicate; Lloyd’s requires uSCR at the 99.5th confidence level on an ultimate basis using an internal model (Lloyd’s Internal Model, LIM). - MWSCR is the 99.5th percentile of member and central losses; CSCR is the 99.5th percentile of central fund losses. - MWSCR reporting: quarterly; CSCR reporting: an NST which is currently annual. - Contingent capital and Ancillary Own Funds (AOF): - Solvency II permits up to 50 percent of SCR coverage with Tier 2 capital including AOF such as Letters of Credit (LoC); AOF cannot cover the MCR and use requires PRA approval. - LoCs used as part of meeting FAL; Lloyd’s imposes internal limit that Members cannot have more than 50 percent of FAL met by LoCs. - AOF share of Available Own Funds: 40 percent at year-end 2015; reduced to 22 percent by year-end 2020. - LoCs must have expiration date not less than four years and counterparties must have at least an A-/A3 rating across the three major rating agencies. - Corporate developments: - In 2018 Lloyd’s established Lloyd’s Insurance Company (LIC) in Belgium to maintain EU business after Brexit. - In December 2020 Lloyd’s transferred Members’ non-life EU business written since 1993 to LIC by Part VII Transfer; LIC is supervised by the National Bank of Belgium. ### Liabilities, asset allocation, and credit quality - Insurance liabilities (end-2020, percent of total liabilities): - Technical provisions - unit-linked: 54.8 percent. - Technical provisions - life (traditional, including with profit): 28.3 percent. - Technical provisions - non-life: 5.5 percent. - Other liabilities: 11.5 percent. - Technical provisions: - Technical provisions account for 89 percent of total liabilities for the whole insurance sector. - Non-life technical provisions account for 5 percent of total liabilities (shorter duration). - Asset allocation (non-unit-linked investments): - Bonds share: 55 percent of investments that do not back unit-linked liabilities. - Bonds share higher in general insurance sector: 64 percent. - Bonds share in life sector: 53 percent. - Credit quality and asset types: - Less than 2 percent of bond holdings carry a speculative grade rating. - A large share of unrated fixed-income investments exists (including equity release mortgages). - Trend since 2016 toward more non-traditional investments such as mortgages and loans. - Life insurers (2016–2020): equity and participations increased by 18 percent; corporate bonds increased by 19 percent. - General insurers (2016–2020): equity exposures decreased by 22 percent; corporate bonds decreased by 16 percent. ### Geographic distribution of investments - Domestic versus foreign: - Domestic investments account for about 56 percent of all investments. - Within domestic investments, around a quarter are government bonds. - Foreign exposures (share of total investments): - United States: 17 percent. - Ireland: 6 percent. - Luxembourg: 15 percent. - These foreign investments comprise mostly mutual funds and help match foreign-currency liabilities. - Currency and liability matching: - Non-life firms and reinsurers have significant USD and EUR liabilities. - Life insurers’ business is more concentrated in the home market and hence in GBP. *Source: IMF staff calculations based on PRA and EIOPA; PRA; Society of Lloyd’s 2020 Solvency and Financial Condition Report.* ### 37. Insurance sector growth rates have been muted recently, and premiums have been ### 1gbrea2022010 - 37. Insurance sector growth rates have been muted recently, and premiums have been ### Premium trends and market structure - Gross written premiums in life insurance grew by only 9 percent from 2016 to 2020 and even fell by 18 percent from a temporary peak in 2018. - General insurance premiums declined by 6 percent since 2016. - Part of the decline is attributed to Brexit which led to some relocation of business, especially cross-border business into the EU. ### Profitability and investment reliance - General insurers exhibit muted profitability and depend on positive investment returns. - Combined ratios—the sum of loss ratios and expense ratios—fluctuate slightly above 100 percent, indicating underwriting losses that need to be compensated by investment profits. - Investment revenues have remained fairly stable, even during heightened market volatility in the first quarter of 2020, with streams of interest and dividends contributing to, on average, positive returns in both the life and general sectors. ### Solvency coverage, long-term guarantee measures, and transitionals - Since implementation of Solvency II, weighted average SCR ratio has been hovering slightly above 150 percent since 2016, well above regulatory thresholds but consistently lower than European peers. - EU life insurers’ SCR ratios fluctuated between 200 and 250 percent; EU general insurers recorded SCR ratios around 250 percent. - Matching Adjustment (MA) and Transitional Measure on Technical Provisions (TMTP) have substantial impacts: - Without using the MA, the value of technical provisions would be GBP 42bn higher (+3 percent). - Without the MA, the SCR would be higher by 44bn (+60 percent). - Without the MA, eligible own funds to meet the SCR would be lower by 37bn (-32 percent). - Without the TMTP, the value of technical provisions would be GBP 27bn higher (+2 percent). - Without the TMTP, eligible own funds to meet the SCR would be lower by 21bn (-18 percent). - Without the TMTP, the SCR would be higher by 3bn (+4 percent). ### Use of internal models and capital requirements - Less than 20 percent of solo entities use either a full or a partial internal model, but these insurers represent around 80 percent of the sector in terms of assets. - Another statement: 18 percent of insurers use a partial or full internal model for calculating their capital requirement, representing 79 percent of the market. - On average, using an internal model results in a reduction of required capital of around one quarter. - Market risks contribute most to the undiversified basic solvency capital requirement, followed by life underwriting risk; market and life underwriting account for 68 and 16 percent respectively of the undiversified basic SCR. ### Top-down solvency stress test results and scenarios - A top-down solvency stress test of 14 larger U.K. insurers (covering around 70 percent of the market) found the sector largely resilient, with vulnerabilities from lower interest rates and equity price declines, particularly for life insurers. - Insurers have risk-mitigating mechanisms that can be deployed in stress (changes in underwriting standards, reinsurance program adjustments, withholding profits, de-risking asset allocation), but the stress test assumed a static balance sheet and did not model these management actions. - Scarring scenario (further deterioration of the COVID-19 pandemic): - Life insurers are considerably more affected than general insurers. - All life insurers would still sufficiently cover liabilities with assets, but the excess of assets over liabilities declines by more than 15 percent for the median firm. - Solvency ratios of two firms would drop below the 100 percent threshold. - The downward interest rate shift increases liabilities, partly offset by the MA rising with higher credit spreads. - For general insurers, balance sheet impact is smaller and solvency ratios remain well above 100 percent; increase in corporate bond spreads contributes most to reduction in available capital. - Tightening financial conditions scenario: - Aggregate impact on both sectors is milder. - Most life insurers would see higher solvency ratios due to higher interest rates reducing liabilities. - For the median general insurer, the SCR ratio declines marginally. - The analysis does not account for higher claims inflation effects on general insurers’ earnings. ### Liquidity risks and margin calls - Analysis of five large life insurers indicates that sizable upward shifts in interest rates would not cause systemic liquidity stress, given existing sufficient buffers of cash and liquid assets; however, cash buffers differ markedly at the group level. - Liquidity risks could increase when other derivative stresses are combined with higher outflows following policy surrenders or catastrophe events, or from lower premiums. - The PRA’s March 2020 experience: insurers used a full range of mitigating measures (stopped investing cash inflows, withheld dividend payments) and widely tried to avoid asset sales—interpreted as regulatory incentives for buy-and-hold investments (particularly related to the MA) having worked in practice. - More granular, liquidity-specific data are needed, particularly for annuity writers and insurers with large derivative holdings; the PRA plans to obtain specific liquidity data from certain insurers to close these gaps. ### Supervisory response and COVID-19 impacts (Box 4) - PRA firm engagement: - Insurers’ balance sheets proved rather stable during COVID-19, with solvency ratios declining only temporarily during market volatility in February/March 2020. - Matching adjustment largely offset impact of higher spreads on sovereign and corporate bonds for life insurers. - Earnings of life insurers declined due to lower new sales; higher mortality had a slightly beneficial effect on annuity writers via experience profits. - PRA emphasized prudence in allowing COVID-19 experience into future longevity assumptions. - PRA engaged with general insurers on exposures in affected business lines (business interruption, event cancellation, travel) and asked selected insurers for stress tests combined with asset stresses. - FCA firm engagement: - From March to December 2020, FCA had COVID-19 firm engagement plans with regular contact (weekly or bi-weekly) and ad-hoc engagement on issues like business interruption and travel cover; focus was primarily on operational resilience. - Business interruption (BI) test case and payments: - Following High Court and Supreme Court judgments, many thousands of policyholders had COVID-19 related BI claims paid. - Over 32,000 policyholders have received over £1.25bn in claim payments for Covid-19 related business interruption losses (on 13 January 2022). - Guidance and consumer support: - FCA guidance (first issued May 2020, updated August 2020 and October 2020) expected firms to review customer cover, allow premium reductions where appropriate, waive alteration fees, and grant a payment deferral of between 1 and 3 months where amendments do not help alleviate financial difficulty. - FCA guidance in July 2020 addressed product value and expectations for identifying material issues from COVID-19 affecting product value and customer outcomes. - Financial resilience survey: - Between June and August 2020, the FCA’s COVID-19 impact survey to solo-regulated firms saw 3,370 insurance intermediaries respond in Phase 1; the survey was repeated after a 3-month interval. - A small number of insurance intermediaries were at risk of failing with the potential to cause consumer harm. - Dear CEO letter: - FCA required relevant firms to review adequacy of client assets arrangements and to take immediate action and notify the FCA of material concerns where deficiencies were identified. *Source: IMF staff calculations and text in 1gbrea2022010 (IMF).* ### 46. The U.K. Government’s economic policy objective is to achieve strong, sustainable and ### 46. The U.K. Government’s economic policy objective is to achieve strong, sustainable and balanced growth. Price and financial stability are essential pre-requisites to achieve this objective in all parts of the United Kingdom and sectors of the economy. ### Monetary and financial-stability policy framework - The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to keep inflation low and stable, which supports growth and jobs. - Subject to maintaining price stability, the MPC is also required to support the U.K. Government’s economic policy. - The U.K. Government has set the MPC a target for the 12-month increases in the Consumer Prices Index of 2 percent. - The Bank of England’s Financial Policy Committee (FPC) identifies, monitors and takes action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the U.K. financial system. - The FPC also has a secondary objective to support the economic policy of the U.K. Government. - IMF Executive Board: when concluding the 2020 Article IV Consultation with the United Kingdom, Directors commended the United Kingdom’s policy frameworks. Staff noted the authorities’ policy response to the COVID-19 pandemic as an example of well-coordinated action and were supportive of monetary policy actions by the MPC. (IMF Press Release PR20/379, December 18, 2020) ### A well-developed public infrastructure for financial services - The United Kingdom provides the financial services industry with: - a well-established insolvency framework - an efficient and independent judiciary - comprehensive and well-defined accounting principles and rules - a system of independent external audits - secure, efficient and well-regulated payment and clearing systems - efficient and effective credit bureaus - public availability of basic economic, financial and social statistics ### Effective market discipline and corporate governance - The Financial Reporting Council (FRC) promotes transparency and integrity in business; it regulates auditors, accountants and actuaries and sets the United Kingdom’s Corporate Governance and Stewardship Codes. - The United Kingdom has some of the highest standards of corporate governance in the world. - Market-discipline mechanisms: - extensive presence of institutional investors and high involvement of major rating agencies and analysts - well-developed system of regular disclosure by public companies - Insurance-sector enhancements: - Solvency II implementation in 2016 materially enhanced disclosures through Pillar 3, covering board composition and effectiveness, key functions, the role of board committees, risk management, remuneration and relations with shareholders. - The PRA has set out expectations regarding external audit of the public disclosure requirement. ### Mechanisms for consumer protection - The Financial Services Compensation Scheme (FSCS): - is the United Kingdom's compensation fund of last resort for customers of authorized financial services firms. - may pay compensation if a firm is unable, or likely to be unable, to pay claims against it. - is independent of the U.K. Government and the financial services industry and was set up under FSMA. - became operational on 1 December 2001 (and covers claims from before this date protected under previous compensation schemes). - does not charge individual consumers for using the service. - covers policyholders for business conducted by firms authorized by the FCA and the PRA; customers of European firms authorized by their home state regulator that operate in the United Kingdom may also be covered. - is governed by the Financial Crisis Management MoU, the COMP sourcebook of the FCA Handbook and the Depositor Protection and Policyholder Protection chapters of the PRA Rulebook. - The FSCS currently covers: - deposits - insurance policies - insurance broking (for business on or after 14 January 2005), including connected travel insurance where the policy is sold alongside a holiday or other related travel (for business on or after 1 January 2009) - investment business - home finance (for business on or after 31 October 2004) ### Financial markets and insurer activity - The United Kingdom has a large and sophisticated financial services sector offering a full range of financial instruments, including index-linked debt and a spread of maturities. - Insurers have access to U.K. and international equity and property markets and are increasingly moving into alternative asset categories such as infrastructure and private equity. - U.K. insurers use derivatives markets for risk management purposes. ### Summary of observance with the ICPs — key findings and recommendations - ICP 1 (Objectives, Powers and Responsibilities of the Supervisor) — Observed (O) - HMT launched the Financial Services Future Regulatory Framework Review (FRF) in 2020; a second consultation was published in November 2021 (FRF Review 2021 Consultation). - Recommendation: preserve the primacy of the PRA’s and FCA’s primary objectives; avoid proliferation of wider policy priorities or “have-regards” that could divert focus from safety and soundness, financial stability and protection of policyholders. - Recommendation: simplify and streamline the legislative framework for insurance supervision to make it easier for firms to navigate. - ICP 2 (Supervisor) — Largely Observed (LO) - Legal and operational independence of regulators is generally present except as noted in relation to the Solvency II review. - Concern: Solvency II review and legislative structure appear to constrain PRA independence in rule making, transferring ultimate decision making to ministerial level with objectives not fully aligned with the PRA’s primacy. - Recommendation: ensure PRA advice requests from HMT are transparent and that PRA can provide independent, transparent advice; final positions in Solvency II Review should be consistent with the Insurance Capital Standard (ICS) monitoring period ending in 2024. - ICP 3 (Information Exchange and Confidentiality Requirements) — Observed (O) - PRA and FCA have a sound legislative basis for sharing and protecting confidentiality; extensive MoUs and MMoUs with U.K. and foreign regulators. - ICP 4 (Licensing) — Observed (O) - Clear licensing framework and Threshold Conditions; preapplication process transparent. - Issue: TPR-related applications create a peak load; teams/processes expanded through to December 31, 2023. - Recommendation: PRA and FCA teams dealing with TPR-related authorization applications should develop contingency resourcing plans. - ICP 5 (Suitability of Persons) — Observed (O) - Senior Managers & Certification Regime (SM&CR) improved individual accountability; PRA review (December 2020) found increased responsibility by senior managers. - Stakeholders requested more guidance on interim appointments, temporary and conditional approvals, and link between SM&CR and remuneration rules. - Observations on enforcement: sanctions in the insurance sector have not been based on SM&CR breaches to date; PRA often uses supervisory intervention and permits withdrawals of applications rather than issuing formal rejection notices. - Recommendation: PRA should continue to exercise the full range of formal powers alongside supervisory interventions. - ICP 6 (Changes in Control and Portfolio Transfers) — Observed (O) - Processes are well-established; coordination between PRA, FCA and Court effective. - Typical annual change-in-control applications: around 60 applications per year, with some three to five withdrawn by the applicant. - Part VII transfers spiked around Solvency II implementation and with Brexit: 51 out of 64 transfers over the last four years were related to Brexit. - PRA and FCA expanded resources and engaged early with the High Court to manage workload. - ICP 7 (Corporate Governance) — Observed (O) - Comprehensive governance rules and strong regulatory focus. - Data quality concerns observed during stress testing: inconsistencies and gaps across firms hampered liquidity stress testing work. - Recommendation: conduct a thematic review across regulated insurers to review data quality and financial reporting processes to improve data submitted to the PRA, especially as the PRA seeks to become more data driven under its 2026 Strategy. - ICP 8 (Risk Management and Internal Controls) — Largely Observed (LO) - Regulatory requirements largely comprehensive. - Two gaps: new ComFrame requirements for the group-wide actuarial function and the group-wide internal audit function. - Recommendation: PRA should develop a supervisory statement addressing group-wide actuarial and internal audit function requirements to meet ComFrame obligations. - ICP 9 (Supervisory Review and Reporting) — Largely Observed (LO) - PRA’s supervisory approach is sophisticated and structured and well anchored in statutory objectives. - Concern: lack of on-site supervisory activity targeted at business processes and limited discussions with front-line staff; deep dive reviews tend to focus on senior management and desk reviews. - Note: COVID-19 pandemic increased virtual meetings and reduced on-premises engagement, but the approach to deep dives is by design. *Source: Excerpt from IMF staff report on the United Kingdom (1gbrea2022010) — chapter text provided in source PDF.* ### Section 166 reviews by skilled persons are undertaken as an alternative to ### 1gbrea2022010 - Section 166 reviews by skilled persons are undertaken as an alternative to ### On-site inspections, Section 166 skilled person reviews, and PRA resourcing - Section 166 reviews by skilled persons are undertaken as an alternative to PRA-staffed deep dive reviews. - The PRA should consider increasing and deepening its on-site inspection activity and consider bringing in-house some of the deep dive reviews outsourced to skilled persons. - Cost recovery options for PRA resourced on-site inspections under FSMA should be explored. - The Section 166 review is a useful tool in a number of circumstances but the PRA’s use does seem to cover the scope covered by other jurisdictions in their own on-site inspections. - The PRA’s strategic review report notes that, considering stretched resources, the PRA needs to prepare as an organization for the challenges and opportunities ahead and implement more flexible and risk-based resourcing for supervision. - The mission supports flexible, risk-based resourcing but recommends further consideration be given to increasing the resources applied to on-site supervision so that the overall envelope of resourcing is increased. - The cost to regulated firms of section 166 skilled person reviews should be considered as part of the overall resource consideration. - The mission recommends internalizing some of the work carried out by skilled persons, which means the PRA will need to consider deploying the necessary resources to replace those section 166 reviews and recovering costs accordingly. ### FCA and PRA supervisory approaches and coordination - The FCA’s approach to supervision of insurers emphasizes portfolio supervision with some dedicated fixed firm supervision; it appears an appropriate compromise in allocation of resources for a conduct regulator. - The FCA should continue to review its approach to fixed and portfolio supervision to ensure an effective risk-based approach in accordance with business needs and industry developments, taking resourcing into account. - The mission notes a recent reduction in fixed firm supervision in preference for more portfolio supervision in the insurance sector; the incremental resource implications of the FCA extending its fixed firm supervision to all PRA Category 1 and 2 firms appears minimal in the overall context of FCA supervision resources. - Overall, insurance sector supervision is optimized where PRA and FCA information sharing is amplified for the most significant firms. ### ICP assessment highlights and statistics - The PRA and FCA have a broad range of legal powers, including sanctions under the SM&CR, imposing requirements, Threshold Conditions modifications, self-wind downs, unlimited financial penalties, and public censure. - The PRA applies a “comply or explain” supervisory approach; the FCA applies an “assertive supervision” approach alongside more formal sanctions or enforcement measures. - The PRA has the same enforcement powers over firms operating in the United Kingdom as branches as it has over subsidiaries and is legally empowered to take remedial actions such as addressing failure to satisfy the Threshold Conditions. - Contested proceedings before the PRA’s Enforcement Decision Making Committee are relatively infrequent. - Macroprudential supervision of the insurance sector could be enhanced; the last sectoral deep dive for the insurance sector was undertaken in 2016. - The Bank of England should undertake a deep dive review of the role and potential systemic relevance of Lloyd’s and the London Market in international markets, focusing on substitutability and market share. - Table 4 summary of observance levels: - Observed (O): 17 - Largely observed (LO): 6 - Partly observed (PO): 1 - Not observed (NO): 0 - Total: 24 ### Key recommendations (selected from Table 5) - Consider overall resourcing needs for PRA and FCA supervision when reviewing IMF recommendations. - Increase PRA on-site inspection activity and therefore supervisory resources available, exploring cost recovery options for this exercise under FSMA. - The PRA should internalize some work currently outsourced to skilled persons and recover costs accordingly. - The FCA should continue to review its approach to fixed and portfolio supervision to ensure effective risk-based supervision in accordance with business needs and industry developments, taking resourcing into account. - Develop, in line with current plans, a comprehensive insurer resolution regime and ensure powers extend to head of insurance groups and allow for an entire group approach to resolution. - Finalize development of resolution plans for all IAIGs and consider development of resolution plans for significant insurers that are not IAIGs. - Continue to maintain high standards for the eligibility of assets for the matching adjustment and scrutinize the performance of illiquid assets in stressed markets. - Monitor the implementation progress with regard to IFRS 17 and ensure that insurers lagging behind do not excessively pull resources from other critical projects and day-to-day risk management and control functions. - Develop regulations or guidance to address the relationship between ALM policies and product development, pricing functions and investment management. - Require IAIGs to develop liquidity risk management plans taking into account the requirements of CF16.9d. - Enhance the structure and the regularity of consideration of macroprudential risks of the insurance sector through regular reporting by the PRA Insurance Directorate on broad trends in the industry. - Undertake a deep dive review of the role and potential systemic relevance of Lloyd’s and the London Market in international markets and cooperate with other supervisors on this review. - Finalize the process of putting in place Crisis Management Groups for all IAIGs and ensure appropriate membership. - Set up a platform for supervisory cooperation for Lloyd’s to allow interactions with supervisors where Lloyd’s operates both regulated operations and without physical operations. *International Monetary Fund — assessment text excerpt.* ### 41. The U.K. authorities welcome the IMF’s comprehensive review of the United ### 41. The U.K. authorities welcome the IMF’s comprehensive review of the United Kingdom’s insurance supervisory and regulatory framework ### Context and authorities’ stance - The U.K. authorities welcome the IMF’s comprehensive review of the United Kingdom’s insurance supervisory and regulatory framework. - The assessment has come at an important time as the U.K. authorities continue to develop and transition to the new regulatory structure and supervisory approach following the United Kingdom’s exit from the EU. - The ambition of the U.K. authorities: for the U.K. financial services sector to be "the best regulated in the world, aligning competitive and innovative markets of unquestioned integrity with the highest standards of conduct." - The U.K. approach is "forward looking, judgment based prudential and conduct regulation" and does not seek to operate a "‘zero failure’ regime." - The U.K. approach aims to ensure that a failing financial firm does so "without significant disruption to the supply of critical financial services or a material negative impact on consumers." - Supervisory intensity is risk based, focusing resources "where the risk to financial stability and policyholder protection is the greatest." - The U.K. authorities consider the "current level of scrutiny given to the supervision of smaller firms is appropriate, proportionate and is in line with their statutory objectives, including ensuring the safety and soundness of the U.K. financial system." - The U.K. authorities express support for the role of the FSAP in contributing to improvements in supervisory practices and promoting the soundness of financial systems; they "look forward to continuing the dialogue with the IMF and other global counterparts." ### Key features of the U.K. regulatory framework - Post-Brexit framework is complex and multi-layered: retained EU law, U.K.-made primary or secondary domestic legislation (primarily FSMA), PRA rulebook, Supervisory Statements, and the FCA handbook. - At the end of the Transition (EUWA 2018) the U.K. "incorporated all directly applicable EU legislation (including regulations) into U.K. law" as "retained EU law" (defined in section 7 EUWA 2018). - "Conforming changes" were made to retained EU law guided by treating the EEA the same as the rest of the world; U.K. Ministers given power to amend retained law to prevent, remedy or mitigate failures or deficiencies. - U.K. financial regulators, including FCA and PRA, were delegated powers by HMT to address deficiencies in EU regulations containing Binding Technical Standards. ### ICP 1 — Objectives, powers and responsibilities of the supervisor (findings) - Each authority responsible for insurance supervision, its powers and the objectives of insurance supervision are clearly defined. - PRA general objective: "to promote the safety and soundness of PRA-regulated firms" under FSMA; PRA’s insurance objective: "contributing to the securing of an appropriate degree of protection for those who are or may become policyholders." - PRA secondary objective (SCO): "to facilitate, insofar as reasonably possible, effective competition in the markets for services provided by PRA-regulated firms in carrying on regulated activities." The SCO became effective in March 2014. - SCO applies to PRA’s exercise of general functions (making rules under FSMA, preparing and issuing codes under FSMA, determining general policy and principles by reference to which the PRA performs functions under FSMA). - SCO does not require PRA to act incompatibly with primary objectives; PRA should consider—but is not required to adopt—options that deliver greater benefits to competition for a given objective of safety and soundness. - PRA required to produce an annual competition report setting out how it is delivering against the SCO; reviews since 2016 show instances where SCO influenced insurance regulation and supervision, including: - adoption of a proportionate approach to non-Solvency II firms; - encouraging applications to use internal models and/or the matching adjustment; - developing a regulatory framework to encourage an insurance-linked securities market in the United Kingdom; - policy developments to refine implementation of the Solvency II regime including streamlining the Solvency II major model application processes; - the launch of the New Insurer Start-up Unit. - PRA and FCA required to have regard to regulatory principles (pursuant to Section 3B of FSMA) when exercising functions; regulatory principles include: need to use resources efficiently and economically; proportionality of burdens; desirability of sustainable growth in the U.K. economy in the medium to long-term; exercising functions as transparently as possible. - Prudential Regulation Committee (PRC) required to have regard to aspects of U.K. Government economic policy recommended by HMT, currently including: competition, growth, competitiveness, innovation, trade, better outcomes for consumers and climate change. - FCA strategic objective: "to ensure relevant markets function well" (insurance is one); FCA operational objectives: "to protect consumers, enhance market integrity and promote effective competition in the interests of consumers." - PRA and FCA have broad legal powers to enforce prudential standards under Part XI of FSMA; insurers required to meet Threshold Conditions set by FSMA (Schedule 6, Part 1 of FSMA) including adequate financial resources and conducting business in a prudent manner. - PRA and FCA have flexible rule making powers under Part 9A, Chapter 1 of FSMA, including power to alter, revoke, modify or waive rules (Section 138A of FSMA). - PRA and FCA required to be transparent in rule making, bringing drafts to public attention accompanied by cost-benefit analysis and explanations of purpose and compatibility with general duties under FSMA. - HMT responsible for introducing new financial services legislation; PRA and FCA interact significantly with HMT in policy formulation and legislation (e.g., onshoring EU law). - Assessment: FRF (Financial Services Future Regulatory Framework Review) launched by HMT in 2020; FRF Review 2021 Consultation published November 2021 sets detailed proposed measures and shows a "clear direction of travel." - FRF proposals would empower FCA and PRA to set regulatory and supervisory requirements subject to enhanced accountability arrangements — the IMF assessment considers this "a proposal that goes in the right direction." - FRF Review 2021 Consultation proposes secondary objectives for FCA and PRA to "facilitate the long-term growth and international competitiveness of the U.K. economy" and would give HMT ability to establish activity specific 'have regards' and obligations for regulators to consider. - Risk noted: these new objectives and obligations "must be carefully designed and implemented" to avoid increasing weight assigned to non-prudential considerations in PRA and FCA decision making and could pose "a risk to future observance of ICP 1" unless designed to preserve focus on primary objectives and operational independence. - Recommendation: "that the legislative framework for insurance supervision be simplified and streamlined, making it easier for firms to navigate." ### ICP 2 — Supervisor (independence, accountability, resources) (findings) - PRA is part of the Bank of England (BoE) which is owned by HMT; PRA required by law to operate within FSMA statutory framework and objectives; actions outside framework potentially subject to court challenge. - Prudential Regulation Committee (PRC) exercises Bank of England’s functions as the PRA. - BoE is "structurally free from operational political influence" though owned by the U.K. Government; Court of Directors appointed by the U.K. Government. - PRC terms of reference provide for twelve members: five BoE staff, the FCA chief executive and at least six external members appointed by the Chancellor of the Exchequer. As of November 2021, there are eleven members with five external members appointed; one external member position is open after term expiration on August 31, 2021. - PRC responsibilities include: - Reporting annually to the Chancellor on adequacy of PRA resources and the extent of independence from Bank’s other functions; - Making rules under FSMA; - Developing and monitoring PRA strategy; - Setting out PRA’s statutory guidance for advancing objectives by sector; - Giving and revoking certain statutory directions under FSMA. - Solvency II review was underway at assessment; Solvency II was onshored to U.K. law to continue applicability after the Brexit transition from 1 January 2021. - HMT led the Solvency II consultation and ultimate decision-making is at ministerial level; HMT stated review objectives include: - protect policyholders and ensure safety and soundness of firms; - "to spur a vibrant, innovative, and internationally competitive insurance sector"; - "to support insurers to provide long-term capital to underpin growth, including investment in infrastructure, venture capital and growth equity, and other long-term productive assets, as well as investment consistent with the U.K. Government’s climate change objectives." - PRA decision-making: some powers reserved to the PRC; most operational decisions delegated to the CEO, then to the Supervision, Risk and Policy Committee, which can delegate to other committees and individuals; highest impact decisions taken on Category 1 firms at PRC level. - FCA independence and governance: - FCA is a company limited by guarantee; FCA Board is the Governing Body per Schedule 1ZA (paragraph 2 (1)) of FSMA. - Appointments largely by HMT; Chair, Chief Executive and at least one other member appointed by HMT; 2 members appointed jointly by Secretary of State for Business, Energy and Industrial Strategy and HMT; BoE’s Deputy Governor for Prudential Regulation also required as member. - As of November 2021, nine FCA Board Members: seven non-executive board members (including BoE’s Deputy Governor for Prudential Regulation), the Chief Executive and the Chair. - FCA required to submit an Annual Report to HMT on extent regulatory objectives met and to hold an Annual Public Meeting within 3 months after Annual Report issued to HMT. - FCA publishes an annual regulatory perimeter report setting out key perimeter elements and whether perimeter issues require legislative or other changes. - FCA has a supervisory decision matrix defining decision types/levels, decision maker and required authority; mission found decision making levels appear appropriate. - PRA and FCA funding and resources: - Both funded by industries they regulate, including insurers; FCA and PRA can determine funding needs and set statutory fees subject to FSMA accountability mechanisms. - FSMA gives FCA powers to raise fees to cover budgeted Ongoing Regulatory Activity. - Total FCA staffing: "approximately 3,629 full time equivalent staff" with "approximately 256 FTE working on supervision of insurers and insurance intermediaries." - Staff turnover: "7.7 percent." - Mission did not detect concern that FCA lacks sufficient human resources for insurer and intermediary supervision; recommended review of mix of fixed firm and flexible firm supervision given changes (see ICP 9). - PRA consults annually on allocation of fees; in 2019/20 PRA received one response to its consultation which did not change fee proposals; PRA has flexibility to raise additional funds during the year for material changes. - Number of staff working directly in insurance supervision declined from "313 at the end of 2016 to 278 at the end of 2020." Assessment notes that 2016 was first year of Solvency II implementation. - Findings for ICP 9 indicate potentially more on-site supervision resources required, but current resources given supervision approach "appear to be adequate." - PRA reprioritized due to market risks and operating conditions imposed by the COVID-19 pandemic; in 2020 PRA underspent its overall budget and is returning that to supervised firms in determination of 2020/21 fee rates. - Appeals processes: - FCA enforcement actions are taken by the Regulatory Decisions Committee which separates decisions from FCA staff recommending action and allows representation from firms or persons against which action is proposed. *Detailed Assessment — United Kingdom (excerpts provided in the source content).* ### Section 415 of FSMA enables civil proceedings to be brought against the FCA and PRA. ### Section 415 of FSMA enables civil proceedings to be brought against the FCA and PRA. ### Legal framework and appeals - Section 415 of FSMA enables civil proceedings to be brought against the FCA and PRA. - The Upper Tribunal (Tax and Chancery Chamber) can consider appeals against decisions by the FCA concerning the lawfulness rather than the merits of the decision. - Assessment: Largely Observed. ### Protection of confidential information - Section 348 of FSMA restricts disclosure of confidential information by the FCA and PRA and its staff unless the person or firm concerned gives prior consent. - Other restrictions on disclosure include personal data protections in accordance with the Data Protection Act 2018. - FSMA (Disclosure of Confidential Information) Regulations 2001 provide circumstances where confidential information may be disclosed; in relation to a criminal investigation or certain other specified proceedings, Regulators can request confidential information be heard by the court in private. - A breach of section 348 by PRA or FCA staff is a criminal offence punishable by fine or imprisonment or both. - Both the PRA and FCA have comprehensive internal guidelines to guide staff in determining whether they can share information and when to seek internal legal advice. ### Transparency and accountability - Both the FCA and PRA are bound to principles set out in section 3B of FSMA which includes the exercise of their functions as transparently as possible. - Both the PRA and FCA have published their approach to supervision and consult extensively on regulatory policy. - Evaluation and reviews are carried out transparently with publication of evaluation findings (example: Independent Evaluation Office of the BoE’s evaluation of the PRA’s approach to its SCO). - Comments: Overall, there is legal and operational independence of the regulators except as noted in relation to the Solvency II review. There are strong and appropriate accountability processes required by law and these accountability requirements are put into practice by the authorities. ### Solvency II review interactions and independence concerns - The PRA and HMT are working closely on the Solvency II review; HMT draws on the PRA for technical and supervisory expertise. - The PRA conducted a Quantitative Impact Study (QIS) between July and October 2021 to support the Solvency II review. - The PRA’s advice to HMT is not transparent as they are working closely together; the PRA has used speeches of senior staff to set out views on aspects of the Solvency II review (example cited: a speech by Gareth Truran). - Concern: It is not clear how final policy positions of the Solvency II review will be determined and how differences between PRA and HMT will be resolved, given the PRA is not in a decision-making role for the Solvency II review. - Recommendation: Ensure that requests for advice from the PRA are made transparently by HMT and that the PRA can provide that advice in an independent and transparent way so any variation in final policy compared to PRA advice would be clear. - The final positions taken in the Solvency II Review should be consistent with the Insurance Capital Standard (ICS) developed by the IAIS that is currently in the five-year monitoring period ending in 2024. - Note: The intention in the FRF Review 2021 Consultation is to put prudential rule-making within the control of the PRA, which could address the identified independence issue. ### Outsourcing and legal protection of supervisory staff - Both the FCA and PRA can outsource certain supervisory activities to third parties including via s166 and s166A of FSMA. - FSMA provides protection to supervisory staff at the PRA and FCA for acts or omissions in the conduct of their duties except where the act or omission was in bad faith or so as to prevent an award of damages made in respect of an act or omission on the ground that the act or omission was unlawful as a result of section 6(1) of the Human Rights Act 1998. ### ICP 3 — Information Sharing and Confidentiality Requirements - Description: The supervisor obtains information from, and shares information with, relevant supervisors and authorities subject to confidentiality, purpose and use requirements. - Section 348 of FSMA restricts disclosure of information by the PRA and FCA unless there is consent by the firm or person who has provided it or if a disclosure is for the purposes of facilitating the carrying out public functions and there is a gateway for disclosure defined in regulations made by HMT. - The PRA and FCA are under a statutory duty to co-operate with U.K. and foreign regulators which have similar functions and with other bodies that have functions relevant to financial stability (PRA) and financial crime (FCA) (see S354A and S354B of FSMA). - Both the PRA and FCA have signed Memorandums of Understanding (MoUs) with EEA and non-EEA supervisory authorities; the FCA and PRA also have an MoU for sharing information between them. - Examples of cooperation: - Dual regulated insurers provide information to both the PRA and FCA at the same time via monthly Board and other Reports. - A Multilateral Memorandum of Understanding (MMoU) covering all EEA insurance regulatory authorities came into force on 1 January 2021; an MoU between the PRA and EIOPA also came into force on 1 January 2021. - There are fortnightly platform calls involving the PRA and FCA with EIOPA (Chairing) and a number of national European authorities; the need for regular calls is reducing. - The PRA signed a Split of Responsibilities Agreement (SoR) with Central Bank of Ireland in 2019; the PRA intends to agree similar SoRs with other EEA home state authorities once EIOPA issues guidance in 2022. - The PRA assesses MoU needs using a risk-based approach considering the volume of cross-border financial services activity, the presence of U.K.-regulated firms in the host market, and the presence of firms from that jurisdiction in U.K. financial markets. The FCA assesses the need for an MoU after an internal review. - A professional secrecy equivalence assessment is a pre-condition to entering into an MoU that applies to both the PRA and FCA under FSMA. - Data breaches: In response to a Freedom of Information Request by Professional Adviser, the FCA admitted to three data breaches where information was accidentally made publicly available; the FCA Cyber and Information Resilience Department described established processes for responding to data breaches in line with Information Commissioner’s Office (ICO) guidelines and oversight by their Data Protection Officer. The mission considered this not to be an issue that obviously impacts on observance of ICP 3 but noted the FCA and stakeholders would benefit from a more open approach to disclosure about these breaches. - Both the FCA and PRA would notify other supervisors if a disclosure of information they have provided is required through a court proceeding and would seek consent to disclose the information; where consent is not given, both regulators would resist disclosure of information. - Assessment: Observed. - Comments: The PRA and FCA have a sound legislative basis for sharing information and protecting the confidentiality of information. Internal policies and procedures support staff decisions about when to share information and when to seek internal legal advice. The mission observed examples of sharing and of appropriate non-disclosure where safeguards apply. ### ICP 4 — Licensing - A legal entity which intends to engage in insurance activities must be licensed before it can operate within a jurisdiction; requirements and procedures must be clear, objective and public, and consistently applied. - Section 19 of FSMA provides that no person may carry on a regulated activity in the U.K., or purport to do so, unless he or she is an authorized person or an exempt person. - Regulated activities are defined in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 with insurance business defined in Chapter III. - Section 4B of the Financial Services and Markets Act 2000 (Threshold Conditions) Order 2013 requires that to carry on insurance business, an authorized person must be a body corporate, registered friendly society or member of Lloyd's. - Since EU treaty rights ceased to have effect in the U.K. on 31 December 2020, parts of Schedule III of FSMA providing for EEA passports have been repealed. - Section 409 of FSMA (and subordinate legislation made under that power) replicates these rights for Gibraltar-based firms; a temporary access regime for Gibraltar firms will be made permanent with the creation of a Gibraltar Authorisation Regime. - The FCA Handbook (PERG) provides guidance on whether activities fall within the scope of the Act. - The FCA is primarily responsible for identifying unauthorized regulated activities; the PRA or FCA can instigate proceedings against persons conducting unauthorized regulated activities with possible fines or imprisonment on conviction. - The FCA uses complaints data, whistleblowers, the FCA’s contact center, assessment of regulatory returns, and intelligence from other regulators and competitor firms to identify unlicensed insurance activities. - There have been no recent detected cases of unauthorized insurers operating, but there have been instances of unauthorized insurance intermediaries and examples of licensed insurers inadvertently undertaking business in a class not covered by their license. - The FCA has an Unauthorised Business Department responsible for identifying firms operating illegally within the regulatory perimeter. - Cross-border access: to fully access the U.K. markets and to promote services in the U.K., foreign insurers must establish a commercial presence in the U.K. which requires authorization. The U.K. has a regime for the establishment of an overseas branch (third country branch). - Regulation split: - Depending on activities under Part 4A of FSMA, a firm will be solo-regulated by the FCA, or dual-regulated by the FCA and the PRA. - Solo-regulated activities most relevant: insurance distribution activities. - Dual-regulated activities most relevant: insurance business – effecting contracts of insurance and carrying out contracts of insurance. - The PRA is the single point of contact for the application process for insurers that are dual-regulated; application packs and the New Insurers Start Up Unit website are available on the PRA website. - The PRA must obtain the FCA’s consent before it can authorize an insurer. - Pre-application meetings: both the PRA and FCA provide structured pre-application meetings to support applicants and to feedback on matters that may affect meeting Threshold Conditions. - Threshold Conditions require demonstration of Legal Status, Location of Offices, prudent conduct of business (including appropriate financial and non-financial resources), suitability of senior managers and capability of being effectively supervised. - An insurer cannot be given permission to carry on both long-term insurance business and general insurance business unless the long-term insurance business is restricted to reinsurance business. U.K. insurance companies permitted or seeking permission to carry on long-term insurance business may apply for permission to carry on general insurance business in the specified categories ‘accident’ and ‘sickness’. *Source: 1gbrea2022010 - Section 415 of FSMA enables civil proceedings to be brought against the FCA and PRA. https://www.imf.org/-/media/files/publications/cr/2022/english/1gbrea2022010.pdf* ### Section 55V of FSMA states that the regulator, has a maximum of 12 months to ### 1gbrea2022010 - Section 55V of FSMA states that the regulator, has a maximum of 12 months to ### Application timelines, completeness, and decision process - Section 55V of FSMA: regulator has a maximum of 12 months to determine an application; a decision needs to be made within 6 months of an application being deemed complete. - An application is considered complete if there are no material gaps in the application. - In practice, initial applications are often not complete and require a subsequent submission to start the 6-month period. - The pre-application period may be extended as the PRA and FCA work with an applicant to submit a credible license application. - PRA and FCA internal service level agreement: conclude an initial review within 6 to 8 weeks and provide feedback to the firm. - In practice there have been no formal rejections; if an application is unlikely to succeed, the PRA issues a “minded recommending the refusal” letter prompting many applicants to withdraw. - A formal rejection is a statutory notice decision; PRA must publish information about a rejection unless unfair to the applicant or prejudicial to PRA objectives. ### Authorizations, scope, and post-authorization variations - Authorization letters contain a scope of permission notice setting out classes of life or general insurance business allowed. - Firms may request to vary permission to expand product mix beyond initially approved classes. - Since 2016: - 14 new insurers have been authorized by the PRA and FCA. - 4 being the maximum number authorized in any one year. - 5 Lloyd’s Managing Agents have been authorized. - A list of licensed insurers and scope of permissions is provided on PRA and FCA websites. ### Temporary Permissions Regime (TPR), run-off regimes, and Brexit-related volume - EEA firms with valid passports as of December 31, 2020, and a valid notification may continue to access the U.K. market through the Temporary Permissions Regime (TPR). - TPR operates alongside the Financial Services Contracts Regime allowing orderly run-off via: - Supervised Run-Off Regime (SRO): allows run-off for up to 15 years and is subject to PRA and FCA supervision. - Contractual Run-Off Regime (CRO). - There were approximately 700 insurers that had a passport to write business in the U.K.; the vast majority believed not to conduct business in the U.K., but the U.K. lacks data on this. - TPR timing: - TPR lasts until December 30, 2023. - All applications for authorization must be submitted no later than December 30, 2022, to remain in the TPR. - Period of TPR could be extended by HMT. - TPR participation and expectations: - Approximately 180 firms have entered the TPR. - PRA expects 140 firms to apply for a third country branch; the remaining 40 are expected to enter the SRO. - The usual 12-month deadline for deciding on applications has been suspended for TPR-related third country branch applications. - 140 firms applying for licenses over approximately a 2-year period must be considered in light of only 14 new insurers granted authorization since 2016 as well as five Lloyd’s Managing agents. - Workflow is managed by locking firms into submitting an application in a particular quarter. - Majority of insurers applying for third country branches are Category 5 insurers. - There are twelve Category 2 insurers, ten Category 3 insurers, with the remainder in Category 4 and 5. - PRA expectation for third-country branches: under £500 million of insurance liabilities covered by the FSCS when operating as a branch (indicative, not a hard threshold); PRA may require subsidiary authorization if FSCS relevant liabilities exceed this amount. ### PRA/FCA organizational response and resourcing - PRA Cross Border and Restructuring Team (CBRT) handles TPR authorizations and Part VII transfers related to Brexit, supported by PRA Authorisations. - CBRT composition: 23 people (about half from existing supervision staff and half new to the PRA). - FCA dedicated insurance team: 20 people with a further increase of 2 people expected in the new year. - These staff have largely been external hires and built up over 4 years. - Coordination mechanisms between the FCA and PRA are in place. - Specific Brexit resourcing is expected to remain until December 31, 2023. - There is an informal committee of Heads of Department and Senior advisors at the PRA for CBRT referrals on applications and resourcing steer. - No clear contingency plan in place for additional resourcing of the CBRT if applications are more complicated/time-consuming than expected. - Firms in TPR that do not proceed to a third country branch application may move from TPR to CRO or to CRO via SRO; processes were still being developed at time of mission. - If a firm withdraws its application before a PRA decision, it may exit the TPR or submit a new application; withdrawal likelihood may change if firms are less willing to withdraw after ‘minded refusing’ letters. ### Assessment observations and recommendation - Clear legislative framework for licensing of insurance activities in the U.K.; unregulated insurance activity is monitored with regulator powers to act. - Authorization procedures are clear with information packets available; Threshold Conditions ensure sound business planning, fit and proper senior management and significant owners, appropriate governance and risk management frameworks and necessary capital. - Pre-application process provides transparency and enables processing within required 12-month period. - Formal decision making is largely avoided via ‘minded refusing’ letters and voluntary withdrawals; pragmatic but means formal decision-makers do not exercise statutory decision power in many cases. - TPR-related authorization applications represent a peak load of applications; teams and processes have been put in place through December 31, 2023. - Recommendation: PRA and FCA teams dealing with TPR-related authorization applications develop contingency resourcing plans. ### Suitability of persons: Senior Managers & Certification Regime (SM&CR) and related regimes - SM&CR purpose: address individual accountability; rolled out: - to banks in March 2016, - extended to insurers in December 2018, - for insurance intermediaries came into effect in December 2019, - extension to reporting requirements in March 2021. - SM&CR sets out: - functions requiring approval by regulators, - prescribed responsibilities firms must allocate to capable senior individuals, - conduct rules for Senior Managers. - Section 59 of FSMA: authorized firms must ensure individuals seeking to perform specified functions seek approval and meet suitability requirements before taking up their position; Senior Management Functions (SMFs) require formal regulatory approval. - SMF designation: - Majority are PRA-led (e.g., Chief Executive Officer, Chief Finance Officer, Chief Risk Officer, Chief Actuary, Head of Internal Audit). - FCA-led functions include Head of Compliance, Money Laundering Reporting Officer, Chair of the Remuneration Committee. - SMFs cover non-executive directors with responsibilities (Chair, Senior Independent Director, chairs of audit, nominations, remuneration and risk committees). - PRA cannot approve a PRA-led SMF without FCA consent; a single administrative process is operated, communications generally channeled through the PRA; joint interviews where both regulators are involved. - Firms must assess and ensure ongoing fitness and propriety of individuals; SM&CR requires regulatory references for at least six years and firms must provide regulatory references to prospective employers including disciplinary actions. - Fitness & propriety assessment components: - (1) Honesty, integrity and reputation; - (2) Competence and Capability; - (3) Financial Soundness. - 2020 PRA evaluation: in the year to September 2020 across all PRA-regulated firms: - 1,360 applications for approval, - 1,146 applications approved, - 98 applications withdrawn. - Certification Regime: - Applies to significant risk-taking individuals outside senior managers who could cause significant harm. - For ‘large firms’, includes ‘material risk-takers’. - Employees under Certification Regime do not require PRA/FCA approval but firms must assess annually and certify fitness and propriety and maintain records. - Section 63E of FSMA requires authorized persons to ensure no employee performs a specified function unless certified by the firm. - Conditions, time limits and variations: - SM&CR allows FCA and PRA to approve an individual on a time-limited basis or subject to conditions (SUP 10C.12 guidance). - Time-limits may be used where the individual is implicated in ongoing enforcement investigations or where role nature/scale is likely to change. - Conduct standards: - Senior individuals must: (i) act with integrity; (ii) demonstrate due skill, care, and diligence; (iii) be open and cooperative with regulators. - Additional SMF conduct rules include ensuring firm business is controlled effectively and complies with regulatory requirements, reasonable delegation steps, and appropriate disclosure to regulators. - SS35/15: firms should have procedures for monitoring senior individuals’ conduct and adherence to Conduct Standards and must investigate matters relevant to fitness and propriety and notify PRA as appropriate. - Notification triggers to the PRA under section 64C of FSMA (disciplinary action): - the issuing of a formal written warning; - the suspension or dismissal of the person; - the reduction or recovery of any of the person's remuneration. - Supervisors consider ongoing fitness and propriety as part of regular engagement and continuous assessment processes. *Source: 1gbrea2022010 - Section 55V of FSMA states that the regulator, has a maximum of 12 months to* ### Section 422 of FSMA provides a definition of controller (significant owner) for the ### 1gbrea2022010 - Section 422 of FSMA provides a definition of controller (significant owner) for the ### Definition of controller and notification thresholds - Section 422 of FSMA provides a full definition of controller and defines “shares” and “voting power” for calculating relative proposed holdings. - General notification thresholds for persons proposing to acquire: - "10 percent or more of the shares or voting power in a U.K. authorized firm or in a parent undertaking of the U.K. authorized firm"; or - "shares or voting power in a U.K. authorized firm or in a parent undertaking of the U.K. authorized firm as a result of which a person can exercise significant influence over the management of the firm." - For insurance intermediaries (regulated by the FCA only) under the FSMA (Controllers) (Exemption) Order 2009, notification is required when acquiring: - "20 percent or more of the shares or voting power in a U.K. authorized firm"; - "20 percent or more of the share or voting power in a U.K. authorized firm or in a parent undertaking of the U.K. authorized firm"; or - "shares or voting power in the directive firm or its parent undertaking so that the person will be able to exercise significant influence in a U.K. authorized firm or in a parent undertaking of the U.K. authorized firm." - Failure to notify is an offence under Section 191F of FSMA; retrospective notification can be made and suitability must still be assessed. ### Change in control decision process and timelines - Section 185 of FSMA requires the PRA and the FCA, on receipt of a notification of proposed change in control, to: - approve the acquisition; - approve subject to conditions; or - object to the acquisition. - Regulators may object only if there are reasonable grounds based on criteria in Section 186 of FSMA, including: - the reputation of the section 178 notice-giver; - the reputation and experience of any person who will direct the business as a result of the proposed acquisition; - the financial soundness of the section 178 notice-giver, particularly in relation to the type of business pursued or envisaged; - whether the U.K. authorized person will be able to comply with its prudential requirements (including the Threshold Conditions); - if the authorized person will become part of a group, whether the group structure allows effective supervision, information exchange, and allocation of responsibility among regulators; and - whether there are reasonable grounds to suspect money-laundering or terrorist financing in connection with the proposed acquisition. - "The regulators have 60 working days from acknowledging a complete notification to make a determination (with a possibility to ‘stop the clock’ to request missing information)." - Where an insurer is jointly authorized by the PRA and the FCA, the PRA determines approval in consultation with the FCA; the FCA may perform an independent assessment and make representations under Section 187A(3) of FSMA (including in relation to Section 186(f)). ### Controllers regime, approvals, and criminal offence - The PRA Controllers Regime (Part XII of FSMA) requires persons to seek approval via a section 178 notice from the PRA before gaining or increasing control over a PRA-authorized firm. - It is a criminal offence if a person fails to seek and obtain such approval before making the acquisition in question. - Controllers (deemed significant owners under U.K. regulation) must notify the PRA as soon as the controller becomes aware of specified matters, including: - if a controller, or any entity subject to their control, "is or has been the subject of any legal action or investigation which might put into question the integrity of the controller"; - "if there is a significant deterioration in the financial position of a controller"; - "if a corporate controller undergoes a substantial change in its governing body." - Rule 4.1 in the Change in Control part of the PRA rulebook requires firms to notify the PRA as soon as they become aware of the above matters in respect of one or more of their controllers. ### Fitness and propriety assessments; SM&CR and supervisory approach - Fitness and propriety and competence/capability of individuals who exercise control over a regulated firm are assessed: - when a firm applies for authorization via assessment against Threshold Conditions; or - when there is an application for a change in control of an authorized firm. - Assessments are judgement based and depend on supporting evidence provided by the applicant and/or intelligence checks. - The SM&CR focuses on fitness and propriety of individuals employed by the U.K.-regulated entity or employed by the wider group who have significant influence over the U.K. regulated entity by virtue of their group role. - The PRA’s expectations for collective competence are set out in SS5/16 – Corporate Governance: Board Responsibility, and Article 258(2c) of the on-shored Solvency II Delegated Regulation requires that administrative, management or supervisory body members "collectively possess the necessary qualifications, competency, skills and professional experience" relevant to the business. - The PRA expects evidence of effective challenge by non-executive directors and that the chair "ensure that all views are heard and that the executives do not control the board discussion." - Board members’ competence and integrity are considered in supervisory meetings and continuous assessment; deep-dive Board effectiveness reviews provide evidence of collective fitness and propriety. - The SM&CR has "improved individual accountability." The 2016 FSAP described SM&CR as a "major and welcome improvement." A PRA review in December 2020 concluded SM&CR contributed to senior managers taking greater responsibility and made it easier to hold individuals to account. - Since SM&CR implementation the PRA has not issued a formal rejection notice for SMF applicants; it relies more on supervisory intervention and permits applications to be withdrawn by firms under FSMA. ### Enforcement powers and factors considered in enforcement - The PRA has enforcement powers over certain individuals at insurers and can: - impose penalties; publicly censure; suspend approval; withdraw approval from individuals holding SMFs; and prohibit individuals from holding SMFs in the future. - The PRA and FCA have powers under Sections 61, 63ZA and 63ZB of FSMA to impose time limits, conditions and variations on Senior Manager approvals. - The PRA and FCA may use powers under Part 4A of FSMA to vary permission, impose requirements, or change individuals’ approvals where individuals may be contravening or not meeting relevant standards. - The FCA Decision Procedure and Penalties manual (DEPP) sets policy for imposing suspensions, restrictions, conditions, limitations or disciplinary prohibitions under sections 88A, 89Q and 206A of FSMA 2000, and DEPP 8 sets policy on exercising Section 63ZB to vary approvals for designated senior management functions. - The FCA may issue a prohibition order to an individual SMF holder under Section 56 of FSMA. - In assessing enforcement action the PRA considers: - "the impact the individual’s behavior has had, or is having, on advancing PRA objectives, including the behavior of other persons in the insurer over whom the individual should exercise control, and thus whether that behavior calls into question the person’s fitness and propriety (be it an isolated incident or a course of conduct)"; - "whether taking action will serve to deter the person who committed the breach, and others who are subject to the PRA’s requirements, from committing similar or other breaches"; and - "the individual’s behavior towards the PRA, including the level of co-operation and openness, and the appropriateness of the individual’s actions in response to concerns raised." ### Information sharing and international cooperation - Adequate information sharing exists between the PRA and the FCA, including sharing of intelligence received by either regulator. - Both regulators are members of the Shared Intelligence Service, enabling sharing of information about firms and individuals for fitness and propriety assessments. - Where an individual has been active in other jurisdictions and intelligence suggests concerns, the authorities have a number of MoUs with global regulators to facilitate information sharing (see ICP 3). - Dialogue with other regulatory bodies aims to substantiate intelligence so full facts can be considered in fitness and propriety assessments. ### ComFrame and IAIG considerations - For an IAIG, the SM&CR addresses fitness and propriety of group employees who "have a significant influence over the operation of the U.K. regulated entity by proxy of their wider group role." - Two ways group individuals can exert influence: - senior managers from the group taking a shareholder non-executive position on the U.K. regulated entity’s Board: typically notified to regulators but not subject to fitness and propriety assessments if they do not hold SMFs; or - group employees exerting significant influence by virtue of the Group Senior Manager role (e.g., chair of the group board or chair of a key group committee with direct oversight of the insurer): "a full fitness and propriety assessment is conducted." - For an IAIG, board competence both individually and collectively must be commensurate to the complexity and international nature of the IAIG, its operating features, and its risks. ### Observed assessment and supervisory practices - SM&CR implementation has led to greater senior manager accountability; stakeholders requested more guidance on interim appointments, temporary and conditional approvals, and linkages between SM&CR and remuneration rules. - Sanctions in the insurance sector to date have not been based on SM&CR framework breaches, although enforcement action has been taken against individuals. - The PRA prefers encouraging voluntary remediation via firms before using statutory powers but will use enforcement powers retrospectively if necessary. - Board effectiveness reviews are mostly commissioned by insurers and conducted by external firms; PRA-commissioned reviews for insurers are usually done by external firms. This contrasts with banking supervision where more reviews are performed by the PRA itself. ### Mutuals and corporate conversions - There is no definition of "mutual" in U.K. law. "Company" generally refers to an entity registered under the Companies Act 2006. - Friendly societies (under the Friendly Societies Act 1974 or Friendly Societies Act 1992) are generally regarded as mutuals; the Friendly Societies Act 1992 contains provisions for conversions/transfers to stock companies (Part VIII and Schedule 15) and requires Supervisory Authority confirmation before such transfer/conversion can proceed (Schedule 15, Part II). - Some insurers are registered under the Co-operative and Community Benefit Societies Act 2014 and are generally regarded as mutuals; this legislation does not contain an express requirement for Supervisory Authority approval before conversion to a stock company, though FSMA provisions applicable to other firm types apply where a transfer of engagements is involved. - Where a mutual insurer is registered under the Companies Act 2006 (e.g., company limited by guarantee), changes to a different legal entity are subject to FSMA provisions (Part VII transfer, new authorization, or "change of legal status") and subsequent registration by a registering authority. *Source: 1gbrea2022010 - Section 422 of FSMA provides a definition of controller (significant owner) for the* ### Part VII of FSMA and the Friendly Societies Act 1992, set out the rules under which an ### 1gbrea2022010 - Part VII of FSMA and the Friendly Societies Act 1992, set out the rules under which an ### Part VII / Part VIII Transfers: process and regulatory roles - Part VII Transfer: insurer or Friendly Society can transfer or amalgamate all or part of its business portfolio to another insurer; Friendly Society may transfer to an insurer or another Friendly Society (Part VIII Transfer). - Legal effect: no insurance business transfer scheme has effect unless an order to sanction the transfer has been made by the Court (s. 104 of FSMA). - Court process: Part VII process involves a High Court process; by virtue of section 110 of FSMA, both the PRA and the FCA are entitled to be heard and may provide written representations to the Court setting out their views against their respective statutory objectives. - PRA role: - Will lead the process for insurance business transfers. - Responsible for specific regulatory functions connected with Part VII applications. - Approves the independent expert (IE) and the form of scheme report, after consulting with the FCA. - FCA role: - Provides views to the High Court based on assessment of the transfer against its statutory objectives: to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the U.K. financial system, and to promote effective competition in the interests of consumers. - Has regard to PRA’s prudential evaluation (examples: (a) expected impact on financial soundness of firms; (b) consequent impact on security of affected policyholders’ contractual benefit). - Does not replicate PRA’s prudential evaluation; focuses on conduct-regulatory aspects and efficient use of regulatory resources. ### FCA expectations of applicants and independent expert - FCA expects firms to demonstrate adequate consideration of changes and sufficiently analyze adverse impacts on policyholders, in particular: - The applicants have considered whether there are sufficient protections in the transfer documentation or proposals to mitigate against possible adverse impacts on policyholders, including, where relevant, compensation. - The IE has considered the relevant information and the analysis identified above; the FCA considers whether appropriate protections and proposed mitigation have been considered and what mitigations should have been proposed to allow the IE to be satisfied with sufficient confidence. - The policyholder communications describe all areas of potential change which may have an adverse impact, and any mitigating or compensation proposals. - The applicants have adequately explained and justified where they wish to depend on arguments of non-materiality or proportionality. - The description of the scheme is sufficiently clear and fair, contains enough detail and is sufficiently prominent. - FCA review of policyholder representations to the Court: - Objections raised by policyholders, along with applicants’ and IE’s substantive response to, and consideration of, those objections. - How applicants have categorized policyholders who continue to object. - How applicants have addressed the initial concerns of those policyholders who no longer wish to object. - How applicants propose to set out for the Court the representations of policyholders who believe that they may be adversely affected. ### Assessment observed: workload, coordination, and application trends - Processes around change in control and portfolio transfers are well-established; coordination between the PRA, the FCA and the Court appears to be effective. - Applications for change in control: - Total of around 60 applications per year. - Some three to five are withdrawn by the applicant. - Part VII transfer waves: - Increase in transfers in run-up to Solvency II implementation and early stages of regime as insurers sought better capital management under Solvency II. - Another wave over the last four years related to Brexit: 51 out of 64. - Resource management: - PRA and FCA resources were expanded to manage workload. - PRA engaged early with the High Court about expected application numbers so proceedings were completed without major delays. - Timeline drivers: the timeline of each portfolio transfer is driven by the involved insurers and the Court. ### ICP 7 Corporate Governance: framework, rules and supervisory practice - Requirement: insurers must establish and implement a corporate governance framework providing sound and prudent management and oversight and adequately recognizing and protecting policyholders’ interests. - SM&CR and MRM: - SM&CR detailed in relation to ICP 5 provides the framework for Corporate Governance; administered by both PRA and FCA. - Management Responsibilities Map (MRM) should include Statements of Responsibilities for each SMF holder and sufficient information on reporting lines and system of governance. - FCA conduct rules: - COCON 2.1 Individual conduct rules and COCON 2.2 Senior Manager Conduct rules apply to all holders of a senior management function except some non-executive directors. - Under SMCR and SYSC 27.2, firms must annually assess fitness and propriety of senior managers and certified staff; breaches leading to disciplinary action must be notified to the FCA. - PRA conduct standards: - PRA Rulebook contains Insurance – Conduct Standards and SS35/15 sets expectations for monitoring conduct of senior individuals and notifying PRA of potential failures. - Company law duties: complementary duties of directors set out in sections 171 to 177 of the U.K. Companies Act 2006. - Solvency II delegated requirements: Article 258 requires effective decision-making procedures and organizational structure; scope to simplify governance requirements if 2021 FRF Review Consultation proposals are enacted. - Proportionality: - Some proportionality: for large insurers, Chair (SMF9) and CEO (SMF1) roles may not be combined; roles may be combined for smaller insurers. - Group executives of large insurance groups may not take on Non-Executive Director roles for U.K.-based subsidiaries. - PRA and FCA may disallow combined roles where conflicts or lack of qualifications/experience exist. - PRA expectations for boards: - SS5/16 ‘Corporate Governance: Board Responsibilities’ sets out expectations; Para 6.1 expects Non-Executive directors to support and oversee executive management. - PRA focuses on senior management accountability; Statements of Responsibilities and MRMs support ongoing supervisor discussions; remedial actions expected to be allocated and documented to relevant SMFs. - PRA can undertake management and governance reviews (desk-based or in-person) and external board effectiveness reviews via section 166 FSMA or insurer-led with PRA input. ### Risk committees, remuneration, reporting and audit oversight - Risk committees: - SYSC 21.1.1 guidance expects FTSE 100 insurers to establish a Risk Committee; smaller firms should consider one based on risk profile. - Majority of U.K. insurers have dedicated Risk Committees; for firms without, FCA expects board procedures to oversee risk management and internal controls (COND 2.5). - PRA Rulebook Rule 2.4 requires written policies on risk management and internal control subject to board approval. - EIOPA Guidelines on the System of Governance Guideline 6 and 17 set expectations for scope/frequency of internal reviews and board responsibility for risk management, appetite and policies. - Chair of the Risk Committee must be approved for SMF 10 and assessed for Fitness and Propriety. - Remuneration: - Comprehensive requirements in Article 258(1) and Article 275(1) of on-shored Solvency II Delegated Regulation. - PRA expectations in SS10/16 and Chapter 11 of SS5/16; additional requirements in Financial Reporting Council’s Corporate Governance code for listed insurers. - Financial and supervisory reporting: - Rule 3.1 of Conditions Governing Business of PRA Rulebook: firms must have processes to identify, measure, monitor, manage and report risks on a continuous basis and their interdependencies. - Rule 2.5 (Reporting part): firms must have appropriate reporting systems/structures and board-approved written policy ensuring ongoing appropriateness of information submitted to PRA. - SM&CR requires senior manager (usually CFO) to hold prescribed responsibility for production and integrity of financial information and regulatory reporting. - External audit governance: - Audit Committee expectations in PRA Rulebook and FRC Code for listed insurers. - Under SM&CR, Chair of Audit Committee (SMF11) oversees internal and external audit process. - PRA supervision requires at least annual discussions with lead partners of audit firms for Category 1 and 2 insurers. ### Dealing with regulators and group-level requirements - Regulatory cooperation requirements: - PRIN 2.1 FCA Handbook requires firms to deal with regulators in an open and cooperative way; Fundamental Rule 7 of PRA Rulebook has a similar requirement. - ComFrame and group disclosure: - No specific governance requirements for IAIGs beyond those applying at solo and group levels. - Rule 19.1 Group Supervision part of PRA Rulebook requires annual public disclosure at group level of legal, governance and organizational structure and description of subsidiaries, related undertakings, and significant branches. - Article 372 of on-shored Solvency II Delegated Regulation requires SFCR submission to include list of subsidiaries, related undertakings and branches and contribution of each subsidiary to group strategy. - SMF7 Group Entity Senior Management Function captures individuals whose decisions must be regularly taken into account by the governing body of the firm. - FCA SYSC 12 sets out systems and control requirements where a firm is part of a group. ### Assessment observed: governance overall and data quality issue - Overall: comprehensive rules related to governance and strong supervisory focus by PRA and FCA. - Data quality observation: - Stress testing work revealed data quality concerns: inconsistencies across firms and gaps in data, particularly hampering liquidity stress testing. - These concerns do not currently hamper supervisory decision making but warrant improvement as PRA seeks to become more data driven as part of its 2026 Strategy. - Recommendation: conduct a thematic review across regulated insurers to review data quality and financial reporting processes to improve quality of data submitted to the PRA. ### ICP 8 Risk Management and Internal Controls: rules and supervisory practice - Supervisory requirement: insurers must have effective systems of risk management and internal controls, including control functions for risk management, compliance, actuarial matters and internal audit. - PRA rules: - Rules 2.5 and 3, Conditions Governing Business part of PRA Rulebook: insurers must have written policy on risk management and an effective, documented risk-management system comprising strategies, processes and reporting procedures to identify, measure, monitor, manage and report risks continuously at individual and aggregated levels and their interdependencies. - Rule 2.4: risk-management system must be integrated into organizational structure and decision-making, subject to prior approval by governing body, reviewed annually and adapted to significant changes. - SM&CR: prescribes responsibilities for culture (PR I and PR H) and specific SM&CR roles related to control functions required by ICP 8. - Conditions Covering Business part rules addressing control functions: - Rule 3.5: firm must provide for a risk management function structured to facilitate implementation of an effective risk-management system. - Rule 4.1: firm must have an effective internal control system. - Rule 4.2: firm must have an effective internal control system including a compliance function. - Rule 6.1: firm must provide for an effective actuarial function. - Rule 5.1: firm must provide for an effective internal audit function. - Rule 7.1: if a firm outsources a function or any insurance/reinsurance activity, it remains fully responsible for discharging all obligations. - Solvency II (on-shored CDR Articles) relevant provisions: - Article 258: policy on risk management setting out responsibilities, objectives, processes and reporting procedures consistent with business strategy. - Article 259: require a clearly defined risk management strategy consistent with business strategy. - Article 266: system of internal controls ensuring compliance and operational effectiveness/efficiency. - Article 268: control functions and reporting lines incorporated to ensure objectivity and independence. - Article 270: compliance policy and plan defining responsibilities, competencies and reporting duties. - Article 271: internal audit function tasks. - Article 272: details of actuarial function activities. - Article 274: oversight and accountability for material outsourcing arrangements. - Supervisory practices: - Supervisors receive management information (including risk committee packs) and use it to form opinions on effectiveness of risk function. - Supervisors meet at least annually with chief risk officer and can undertake deep dives where concerns exist; evidence of PRA deep dives and raising concerns was observed. - FCA also has SYSC rules and its supervisory lens is conduct-focused; FCA assesses suitability of appointees from conduct perspective and has rules on outsourcing (SYSC 8) and has conducted vendor visits abroad. - FCA supervisory focus includes assessing whether firms have a strategy to manage and mitigate risks; firm assessment and portfolio assessment models judge systems and controls effectiveness. ### ComFrame alignment, gaps and supervisory recommendation - ComFrame: extensive and detailed standards within ICP 8. - PRA rules and on-shored Solvency II Delegated Regulations apply at group level; SM&CR roles capture some group responsibilities. - Specific ComFrame gaps noted: - Group-wide actuarial function (CF8.6a and 8.6b): - ComFrame requires group-wide actuarial function to perform an overview of group-wide actuarial activities, opine on risk management and internal controls relevant to its function, and consider overall financial condition including solvency position prospectively. - These aspects are not addressed in PRA rules/expectations; ORSA and SFCR may partially meet requirements but are not explicitly roles for the group-wide actuarial function under PRA rules. - Group-wide internal audit function (CF8.7a): - ComFrame requires independent assessment and assurance to the IAIG board by group-wide internal audit on means of preserving assets and preventing fraud and on reliability, integrity and completeness of accounting, financial, IT systems and risk reporting information. - These requirements are not established in U.K. regulations. - Assessment: Largely Observed. - Recommendation: PRA should develop a supervisory statement on group-wide actuarial function and group-wide internal audit function requirements for IAIGs to specifically address ComFrame requirements. - Additional observation: scope to streamline risk management and internal control requirements to clarify and make them easier to navigate. ### ICP 9 Supervisory Review and Reporting: PRA approach (intro) - Supervisor uses off-site monitoring and on-site inspections to examine insurers’ business, evaluate financial condition, conduct of business, corporate governance and overall risk profile, and assess compliance with legislation and supervisory requirements. - Both FCA and PRA are transparent about supervisory approach and set it out in public documents. - PRA approach: - Anchored in primary objectives and SCO (as set out in relation to ICP 1). - Supervisory approach based on four key principles: 1) judgement-based; 2) forward-looking; 3) risk-based; and 4) proportionate. - PRA does not seek to completely avoid firm failure but to ensure any failure occurs in an orderly way so as not to disrupt availability of financial services in the U.K. and to ensure policyholder protection. - Threshold Conditions: set out in The Financial Services and Markets Act 2000 (Threshold Conditions) Order 2013 that insurers must meet at all times; for dual regulated insurers, some Threshold Conditions are PRA responsibility and some are FCA responsibility. - Fundamental Rules: set out in PRA Rulebook to express the objective of promoting safety and soundness; there are 8 fundamental rules. *Source: 1gbrea2022010* ### 1. A firm must conduct its business with integrity ### 1. A firm must conduct its business with integrity ### Overview - The document lists threshold conditions for firms, beginning with: "A firm must conduct its business with integrity." - Other threshold conditions enumerated immediately after include: - "A firm must conduct its business with due, skill, care and diligence" - "A firm must act in a prudent manner" - "A firm must always maintains adequate financial resources" - "A firm must have effective risk strategies and risk management systems" - "A firm must organize and control its affairs responsibly and effectively" - "A firm must deal with its regulators in an open and cooperative way and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice" - "A firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum disruption of critical services." ### PRA insurer categorisation and potential impact - The PRA divides insurers into five categories based on a potential impact assessment — the potential to adversely affect the PRA’s objectives by failing, coming under operational or financial stress or because of the way in which it carries out its business. - Category descriptions: - Category 1 insurers: "Insurers whose size (including number of policyholders) and type of business mean that there is very significant capacity to cause disruption to the interests of a substantial number of policyholders". - Category 2 insurers: the term "very significant capacity" is changed to "significant capacity". - Category 3 insurers: have a "minor capacity" to cause disruption. - Category 4 insurers: have "very little capacity" to cause disruption. - Category 5 insurers: have "almost no capacity" to cause disruption. - Potential impact methodology notes: - "Potential impact is currently a quantitative calculation with a potential qualitative override." - "The methodology for assignment to risk categories was undergoing changes at the time of the mission which is part of the PRA Strategic Review but the new methodology was not implemented and so was not assessed at the time of the mission." ### PRA risk assessment framework - The PRA’s risk assessment framework: - Considers gross risk of a firm and then considers mitigating factors. - Gross risk is based on: - The potential impact as outlined in the category description above; - The external context and business risk it faces — "the risk context" — and how this might affect the firm’s viability. - Mitigating factors include: - Operational mitigation from management and governance as well as risk management and controls; - Financial mitigation from capital and liquidity; - Structural mitigation from a firm’s resolvability. ### Intensity of supervision - The intensity of the PRA’s supervisory activity varies across firms. - The level of supervision principally reflects the PRA’s judgement of: - A firm’s potential impact on the stability of the financial system; - Its proximity to failure (as encapsulated in the Proactive Intervention Framework); - Its resolvability; - The PRA’s statutory obligations. - "Other factors that play a" (text fragment as provided). *Source: 1gbrea2022010 - 1. A firm must conduct its business with integrity* ### part include the type of business carried out by the firm, and the complexity of the firm’s ### 1gbrea2022010 - part include the type of business carried out by the firm, and the complexity of the firm’s ### PRA: Supervisory approach and structure - PRA publish ‘Supervisory Approach’ documents for banking and insurance. - PRC set the PRA strategy and business plan each year based on: - the PRA’s approach to supervision, - the PRA’s operating model, - the PRA’s risk tolerance, - all agreed by PRC. - PRA’s risk assessment framework: - considers gross risk of a firm and then considers mitigating factors; - gross risk is based on potential impact as outlined in the category description, external context and business risk (the risk context) and how this might affect firm viability; - mitigating factors include operational mitigation (management and governance; risk management and controls), financial mitigation (capital and liquidity), and structural mitigation (resolvability). ### Risk assessment, PSM and supervisory strategy - Annual internal Periodic Summary Meeting (PSM): - formally considers risks posed by the firm, - sets the supervisory strategy for the coming period, - reviews Threshold Conditions assessment, PIF Stage, Potential Impact Category, risk scores on risk elements, supervisory strategy and work plan, key messages to the board and senior management, - agrees actions and reports whether actions agreed at the last PSM have occurred, with emphasis on reporting for Category 1 firms. - PSM characteristics: - senior-level involvement with major judgements made by most senior and experienced PRA individuals; - assessments reviewed by those not directly involved in day-to-day supervision (risk specialists, independent advisers, relevant participants from the rest of the Bank such as the Resolution Directorate); - PSM occurs every 12 months for all insurers; - FCA may be represented on the PSM for higher category firms; - after the PSM, a PSM letter is sent to the firm reflecting key messages and actions expected; - Category 1 firms have mid-point reviews in addition to the annual PSM. ### Proactive Intervention Framework (PIF) and supervisory intensity - The PRA applies its Proactive Intervention Framework (PIF) to determine intensity of supervisory activity based on proximity to failure. - There are 5 PIF stages: - Stage 1 Low risk to the viability of the insurer; - Stage 2 Moderate risk to the viability of the insurer; - Stage 3 Risk to viability absent action by the insurer; - Stage 4 Imminent risk to viability of the insurer; - Stage 5 Insurer in resolution or being actively wound up. - Assessment against 8 risk elements and PIF status are subject to continuous review over the supervisory cycle. - If an insurer moves up PIF stages, supervisory scrutiny intensifies (e.g., deep dives into risk management, enhanced scrutiny of senior managers). - Firms must present remediation plans for out of tolerance risk elements even in PIF Stage 1. - PIF Stage and Impact Category combine to determine supervision intensity and types of supervisory actions. ### Deep dive reviews, skilled person reviews, and on-site activity - Deep dive reviews: - targeted scope, interviews with key individuals, verification of senior management claims, and a report outlining findings and actions; - standardized deep-dive reviews on key financial risk topics may be specified and specialist resources are available to supervision teams. - Activity statistics: - Over the period 2017 to 2020 there were approximately 100 deep dive reviews conducted for insurers. - From 2017 to Q2 2021/22 there have been 34 section 166 skilled person reviews for insurers. - Skilled person reviews under s166 of FSMA: - may be considered deep dive reviews and meet requirements for minimum number of deep dive reviews without being carried out by PRA staff; - used for diagnostic, monitoring, preventative and remedial purposes; - reasons for use include need for independent review, insufficient PRA capacity, lack of specialist skills, or firm inability to tackle issue without external help; - costs for s166 reviews are paid directly by firms; costs should be proportionate to benefits; - supervision teams maintain contact with contracted skilled persons and receive a report at the end of the review. - Observed limitations: - PRA deep dive reviews do not always involve discussions with front-line staff; reviews often focus on senior management and desk-based review; - COVID-19 pandemic resulted in more virtual meetings and fewer premises visits; reduction in s166 reviews noted during pandemic; - mission recommends more on-site observations of business processes and interactions with front-line staff to verify implementation of policies and reliability of reported data. ### Reporting, regulatory templates and outsourcing - Solvency II firms reporting: - required to submit annual and quarterly quantitative reporting templates, plus additional PRA-specific reporting including national specific templates; - firms with approved internal models have additional reporting requirements; - reporting requirements still based in EU Solvency II; PRA issued guidance to make post-Brexit reporting clear. - U.K. IAIGs provide information for the ICS Monitoring phase. - PRA internal tracking: - analysis of regulatory reporting and management information is prompted and tracked through the PRA’s internal system Risk and Work Manager. - Outsourcing review and guidance: - PRA and FCA joint outsourcing review for life insurers in 2019 found heavy concentration of policy administration outsourcing to two providers; - review informed PRA Supervisory Statement SS2/21 Outsourcing and third-party risk management, effective from March 31, 2022; - PRA supervisory documents evidence review of outsourced business functions where appropriate. ### PRA assessment observations and resource considerations - Assessment: Largely Observed for PRA on-site review expectations (ICP 9): - PRA approach is sophisticated, structured and well anchored in statutory objectives; - concern over lack of on-site supervisory activity targeted at business processes and front-line staff interactions; - section 166 reviews by skilled persons substitute for PRA-staffed deep dives but retain institutional knowledge with skilled persons rather than PRA; - supervisors familiar with firm operations are better placed to spot anomalies than purely desk-based reviewers. - Resource recommendations: - PRA strategic review notes need for flexible and risk-based resourcing; - mission supports flexible resourcing but recommends increasing resources applied to on-site supervision and exploring cost recovery mechanisms available in FSMA; - consider internalizing some work carried out by skilled persons, deploying necessary resources to replace those s166 reviews and recovering costs accordingly. ### FCA: Supervisory framework and conduct focus - FCA mission anchors supervision in its mission and five harms: - Confidence and participation threatened by unacceptable conduct such as market abuse, unreliable performance or by disorderly failure; - Buying unsuitable or mis-sold products; customer service/treatment; - Important consumer needs not met because of gaps in product range, consumer exclusion, lack of market resilience; - Prices too high or quality too low; - Risk of significant harmful side-effects on wider markets, the U.K. economy and wider society, e.g. crime/terrorism. - Firms must continually meet Threshold Conditions set out in Schedule 6 of FSMA; supervision assesses compliance and seeks to mitigate risk of harm from business model or culture. - Thematic reviews, multi-firm work and market studies: - FCA annual business plan sets priorities addressed by thematic reviews and market studies with representative firm sampling. - Example: General insurance pricing practices market study began in 2018; final report September 2020 found markets not working well with 6 million policyholders collectively paying an excess of £1.2 billion in premium; consultation on reforms September 2020; final rules issued May 2021; new rules effective 1 October 2021 and 1 January 2022. - Example: Business interruption (BI) test case led to a Dear CEO letter and guidance to policyholders after court judgement. - FCA supervision frameworks: - Whole firm supervision applies to ‘fixed firms’ (dedicated supervision teams) and portfolio supervision applies to smaller ‘flexible firms’. - Fixed firm supervision: - Lead Supervisor accountable for risk identification and work program across entire firm or group; - Lead Supervisor sits within home sector where firm makes most profits; - supervisory strategy agreed via a ‘Firm Evaluation’ meeting at least every two years; - required aspects include schedule of proactive engagement meetings, list of management information (MI) to request, plan for deep dive on-site reviews; - annual strategy meeting with CEO and heads of major business lines. - Flexible firm supervision: - Most firms supervised as members of a portfolio sharing common business model; - 2020 Portfolio firm counts: - Personal and Commercial Lines Insurers 573 - Personal and Commercial Lines Intermediaries 4,446 - Price Comparison Websites 16 - Lloyd’s and London Market Insurers 228 - Lloyd’s and London Market Intermediaries 359 - Life Insurers 167 - portfolios assessed using the Portfolio Assessment Model in a Portfolio Strategy Forum with a common portfolio strategy set; - portfolio letters issued annually communicating expectations, priorities and key messages. - Reactive supervision: - FCA responds to intelligence from complaints, whistleblowers, regulatory returns, other regulators, firms, Consumer/Practitioner/Markets Panels, Members of Parliament and Financial Ombudsman Service referrals; - where adequate quality and sufficient scale/severity of potential harm are identified, FCA investigates root causes and may contact senior managers to explain mitigation steps; - serious misconduct or risk that firm no longer meets Threshold Conditions may lead to enforcement investigation. ### FCA on-site inspections, skilled person reviews and outsourcing supervision - On-site inspections: - regularly carried out for fixed firms though not mandated by supervisory framework; - deep dive reviews often include an on-site element. - Section 166 skilled person reviews: - commonly include on-site components; - used in investigations, enforcement contexts and following thematic/multi-firm reviews; - mainly used reactively to identified issues and complement FCA staff on-site work. - Outsourcing supervision: - firms cannot contract out regulatory obligations and must notify FCA of material outsourcing arrangements; - outsourcing explicitly included in Firm Assessment Model and supervisory strategy development; - FCA 2019/2020 Business Plan highlighted outsourcing and third-party service providers as a priority; - multi-firm review on outsourced service providers (OSPs) in life insurance sector focused on exit planning, business continuity, governance, systems and controls; - some material OSPs are regulated entities under fixed firm supervision. ### Preventive, corrective measures and sanctions (PRA and FCA powers) - Criminal and enforcement context: - carrying on regulated activity in the U.K. without authorization is a criminal offence under section 23 of FSMA; insured can recover sums paid under an unenforceable policy. - FCA’s Unauthorised Business Department (UBD) detects, deters, disrupts and prosecutes unauthorized business, using civil, criminal and insolvency proceedings when appropriate; UBD works with police and U.K. Government agencies and publishes ScamSmart warning-list for known scams/unlicensed firms. - PRA powers (selected): - section 137G of FSMA: require information, appoint skilled persons, conduct investigations, enter premises under warrant and obtain documents; - sections 55M and 55P of FSMA: impose requirements or prohibitions if desirable to advance PRA objectives; - disciplinary/civil/criminal powers include: - withdraw a firm’s authorization or vary permitted activities; - suspend a firm’s permission to carry on regulated activities; - censure firms through public statements; - impose financial penalties; - seek injunctions and restitution orders; - section 66 of FSMA: disciplinary powers against individuals including imposing financial penalties, suspending approvals, and publishing misconduct statements. - PRA use of skilled persons and information powers: - sections 165, 165A, 166 and 166A of FSMA used to commission reports by Skilled Persons for additional information, assessment, expert advice, recommendations or assurance. - PRA expectation on capital and intervention: - firms set capital risk appetites and maintain solvency coverage within these; - PRA expects firms to repair capital positions where SCR coverage falls beneath stated coverage ratios; - supervisors intervene in advance of capital deterioration leading to failure; breach of SCR leads PRA to require repair, restrict new business or remove permission if necessary. - FCA powers (selected): - s.55L of FSMA allows FCA to impose, vary or cancel requirements to a firm’s permissions where: - firm is failing or likely to fail to satisfy Threshold Conditions for which FCA is responsible; - firm has failed, during a period of at least 12 months, to carry on a regulated activity to which Part 4A permission relates; - or it is desirable to exercise the power to advance FCA’s operational objectives. - FCA seeks redress for affected customers via redress schemes, direct engagement with firms, or working with other authorities such as the Financial Ombudsman Service. - Risk Mitigation Programmes (RMP): - can be required for senior management to assess, measure or remediate risks; - RMPs used only where authorities consider senior management capable of effective and timely execution, considering governance, culture, relationships with FCA, and past success of actions set for senior management. *Source: 1gbrea2022010 - part include the type of business carried out by the firm, and the complexity of the firm’s* ### Section 166 - Skilled Persons Reviews might be used, e.g., where the firm has a history of ### 1gbrea2022010 - Section 166 - Skilled Persons Reviews might be used, e.g., where the firm has a history of ### Skilled Persons Reviews and FCA Watchlist - Skilled Persons Reviews (Section 166) can be used where the firm has a history of similar issues, or when there is a lack of confidence in the firm’s ability to deliver an objective report or complete an RMP. - The skilled person can assess failings within a firm and provide recommendations for improvements. - Where a firm is considered to pose a significant risk of harm to the FCA’s statutory objectives, the firm can be added to the FCA Watchlist: - Internal process escalating awareness to the FCA’s Senior Leadership team. - Ensures increased oversight of firms posing the greatest risk of harm. - Monitors the firm’s progress against a time-bound action plan to mitigate the risks. - The firm is made aware that it is on the Watchlist and an action plan is set to address root causes. - The Watchlist is shared with the PRA and HMT. ### Enforcement procedures (PRA and FCA) - Once a PRA investigation has established a breach, the investigation team will consider disciplinary sanctions. - If a financial penalty is considered the most appropriate sanction, it will be calculated taking into account: - disgorgement (depriving the firm/individual of the economic benefit of their misconduct), - seriousness (determine a starting point for the financial penalty by taking a relevant metric, often a firm’s turnover or an individual’s remuneration for one year, and applying a percentage depending on the seriousness of the misconduct), - adjustment for aggravating/mitigating factors, - adjustment for deterrence, - reductions for settlement discount and/or serious financial hardship. - Settlement process: - Investigation team may consider settlement; recommended disciplinary sanction is put to a panel of Settlement Decision Makers. - Settlement Decision Makers are convened according to the PRA’s settlement decision-making procedure and policy for determination of number of penalties and period of suspensions or restrictions in settled cases. - If no settlement is reached, or settlement is not appropriate, the matter is referred to the PRA’s Enforcement Decision Making Committee (operationally independent; members are external appointments). - FCA enforcement: - Where FCA diagnostic work raises suspicions of serious misconduct, or that a firm no longer meets Threshold Conditions, or if a firm failed to take appropriate corrective action, an enforcement investigation may be appropriate. - Not all breaches constitute serious misconduct; many breaches can be remedied without enforcement action. - The FCA uses a wide range of enforcement powers—criminal, civil and regulatory—to protect consumers and act against firms and individuals that do not meet its standards. These actions include: - withdrawing a firm's authorization - prohibiting individuals from carrying on regulated activities - suspending firms and individuals from undertaking regulated activities - issuing fines against firms and individuals who breach rules or commit market abuse - issuing fines against firms breaching competition laws - making a public announcement when the FCA begins disciplinary action and publishing details of warning, decision and final notices - applying to the courts for injunctions, restitution orders, winding-up and other insolvency orders - bringing criminal prosecutions to tackle financial crime, such as insider dealing, unauthorized business and false claims to be FCA authorized - issuing warnings and alerts about unauthorized firms and individuals and requesting that web hosts deactivate associated websites. ### Proportionality in sanctions - Purpose of imposing a sanction: - hold the firm and/or relevant individuals to account for any contravention, - deter others from engaging in similar misconduct. - Sanction should be proportionate to the contravention and the harm caused. - FCA considers steps taken by firm/individual to address harm and to cooperate (including cooperating with any variation of permission or with the imposition of a requirement e.g. under Part 4A of FSMA). - If firms and individuals fully account for harm caused, including putting it right where reasonable, the FCA will consider this when applying sanctions; in extraordinary cases it may determine whether a sanction is required at all. - Failure to address harm or refusal to cooperate may justify heavier sanctions. - FCA will publish the results of its decisions in a Final Notice in accordance with sections 391 and 391A of FSMA; Final Notice will state facts and reasons for concluding there has been serious misconduct. FCA often publishes a press release accompanying an enforcement outcome including criminal cases. ### Cooperation, ComFrame requirements and international engagement - FSMA provisions enabling PRA cooperation with other authorities/bodies (including EIOPA and EEA national competent authorities) in respect of enforcement and associated matters: - Section 55Q (Exercise of power in support of overseas regulator): allows PRA to exercise its own-initiative variation and requirement powers (sections 55J and 55M) at the request of, or to assist, an overseas regulator; subject to overseas regulator contribution towards associated costs as PRA considers appropriate. - Section 169 (Investigations etc. in support of overseas regulator): allows PRA, at request of an overseas regulator, to exercise power to require information from an authorized person (section 165); subject to similar limitations and considerations as section 55Q. - FCA cooperates with other international regulators bilaterally or through international supervisory ‘colleges’. - Intelligence from other bodies is used to identify emerging harm and inform sector views; FCA engages to improve quality of data it holds and shares. - FCA works closely with other regulators and law enforcement agencies in the U.K. and overseas, sharing information, intelligence and know-how and detecting and tackling cross-border misconduct. ### Observed assessment of supervisory powers and practices - PRA and FCA have a broad range of legal powers including sanctions under the SM&CR, imposing requirements, Threshold Conditions modifications, self-wind downs, and unlimited financial penalties and public censure of firms and individuals. - PRA has same enforcement powers over U.K. branches as over subsidiaries and can take remedial actions for failure to satisfy Threshold Conditions. - PRA and FCA tend to resolve matters informally during supervisory process; SM&CR is still a relatively new framework that could be used more often. - PRA applies a “comply or explain” supervisory approach; FCA applies an “assertive supervision” approach alongside formal sanctions or enforcement measures. - Moral suasion by PRA and FCA has generally been effective in addressing deficiencies at individual firms. - Contested proceedings before the PRA’s Enforcement Decision Making Committee are relatively infrequent. ### ICP 12 — Exit from the Market and Resolution: available mechanisms and recent experience - Legislation provides for: - voluntary exit of insurers from the market; and - resolution of insurers that are no longer viable or likely to be no longer viable and have no reasonable prospect of returning to viability. - Mechanisms available for orderly exit: - Closure to new business, through revocation of the “effecting” permission (leaving firm authorized to “carry out” its back book of existing contracts), or a variation of permission to limit extent or nature of new business written. - Portfolio transfer of all or part of insurance business, under Part VII of FSMA. - Schemes of arrangement under Part 26 and 26A of the Companies Act 2006. - Modified insolvency proceedings, including use of various powers (including cram-down) under Part XXIV of FSMA. - Experience since 2016: - 61 general insurers and 29 life insurers have exited the market through Part VII transfers. - Of these, 25 general insurers and 8 life insurers were related to Brexit. - 3 general insurers and 4 life insurers have exited the market through schemes of arrangement under Part 26 of the Companies Act. - Three general insurers have gone into administration of which 2 are now in insolvent schemes of arrangement. - Three general insurers have entered insolvency proceedings. - Run-off market and technical provisions: - Approximately 20 firms acquire run-off portfolios with technical provisions of about GBP 3.5bn. - 40 firms have stopped writing new business and are running off current books with total technical provisions of GBP 8.5bn. - 10 firms in insolvency proceedings with total technical provisions of GBP 3bn. - PRA and FCA role in Part VII transfers: required to present a report to the court regarding the impact of the transfer. - Life insurance portfolio acquisitions: - Acquirer firms specialize in buying life insurance books or entire life insurance companies to run off at a profit. - Other life insurers open for new business also acquire significant portfolios. - PRA insolvency practice since 2016: - PRA has not initiated court administration or other modified insolvency proceedings for insurers that have entered insolvency since 2016. - Insolvencies that have occurred were London Market insurers; only one had unexpired risks. - Limited impact on broader financial stability; PRA focus on orderly failure and policyholder protection. - PRA engaged proactively with Boards and senior management, issued notices restricting disposal of assets, payment of dividends, and informed relevant jurisdictions of insolvency and actions taken. - PRA engaged with FSCS where required and provided assistance to court on impact of insolvency on statutory objectives. - Office holder in insolvency must be subject to PRA’s Senior Manager Regime; PRA remains involved in reporting on progress against run-off or transfer plans. - Part VII Transfers and Schemes of Arrangements used for business restructuring, balance sheet alignment and can be used in failure/insolvency cases though historically rare. ### Policy, legal priorities and statutory protections in insolvency - Direct insurance policyholders have statutory priority over other unsecured creditors (including cedants) in winding-up of an insurer per Regulation 21 of the Insurers (Reorganisation and Winding Up) Regulations 2004: - Priority order (subject to paragraph (3)): - (a) preferential debts. - (b) insurance debts. - (c) all other debts. - Preferential debts rank equally and must be paid in full unless assets insufficient, in which case they abate in equal proportions. - Insurance debts rank equally and must be paid in full unless insufficient assets after preferential debts, in which case they abate in equal proportions. - Where assets available for unsecured creditors are insufficient to meet preferential debts, those debts have priority over claims of holders of debentures secured by, or holders of, any floating charge created by the insurer, and must be paid out of property subject to that charge. - Section 377 of FSMA: - Court power to reduce the value of one or more of the insurer’s contracts when insurer unable to pay debts, as alternative to winding up order. - Any reduction on terms and conditions court thinks fit. - Proposed amendments to section 377 (not yet in place at time of mission) include stay on certain life insurance redemptions and moratorium on termination of outwards reinsurance (and preventing outwards reinsurers from discounting recoverables) during a court-ordered write-down. - Firm obligations for resolution preparedness: - Fundamental Rule 8 of PRA Rulebook: "A firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum disruption of critical services." - Rule 2.6 of Conditions Governing Business part of PRA Rulebook: firms must take reasonable steps to ensure continuity and regularity in performance of activities, including development of contingency plans; employ appropriate and proportionate systems, resources and procedures. - EIOPA Guideline 8 on systems of governance (observed in U.K. and carried forward domestically) requires: "The undertaking should identify material risks to be addressed by contingency plans covering the areas where it considers itself to be vulnerable, and it should review, update and test these contingency plans on a regular basis." ### PRA legal tools for exit and intervention (FSMA sections) - Section 55J (Variation or cancellation on initiative of regulator): - PRA power to vary permission of an insurer if failing, or likely to fail, to satisfy Threshold Conditions for which PRA is responsible, or if desirable to advance PRA’s objectives. - Can vary permission so insurer no longer has permission to effect contracts of insurance; firm would need permission to carry out contracts of insurance to carry out an orderly, supervised run-off. - If insurer failed to comply with MCR and has not provided a credible plan to restore MCR compliance within 3 months, under Part 7B of Section 55J PRA must use power to remove insurer’s permission to undertake insurance business. - PRA can also suspend permission to carry on regulated activities under section 206A of FSMA. - Section 55M (Impose requirements on PRA-authorized person): - Enables PRA to impose a requirement if it appears the person is: - failing, or likely to fail, to satisfy Threshold Conditions for which PRA is responsible; - has failed, during a period of at least 12 months, to carry on a regulated activity; or - it is desirable to exercise the power to advance any of the PRA’s objectives. - PRA power under subsection is to: - a) impose a new requirement, - b) vary a requirement imposed by the PRA under this section, or - c) cancel such a requirement. - Section 55M enables PRA to impose requirements such as a capital add-on which would increase a firm’s SCR; exercisable where undertaking's risk profile deviates significantly from assumptions underlying the SCR whether calculated by standard formula or internal model. - Non-compliance with SCR is a trigger event for principal loss absorbency mechanisms in certain types of Tier 1 own funds, effecting a write-down of these debts (useful only for insurers with these forms of Tier 1 own funds). - Solvency II ladder of intervention: - Provides for PRA to intervene prior to MCR breach, i.e., after SCR breach has occurred. - Such an event would trigger the PRA’s Proactive Intervention Framework (PIF) and an insurer failing SCR or subsequently MCR would be put in the highest PIF stage. *Source: 1gbrea2022010 - Section 166 - Skilled Persons Reviews might be used, e.g., where the firm has a history of (PDF).* ### Section 55P of FSMA enables the PRA to impose prohibitions and restrictions such as ### 1gbrea2022010 - Section 55P of FSMA enables the PRA to impose prohibitions and restrictions such as ### Section 55P of FSMA - Enables the PRA to impose prohibitions and restrictions. - Example prohibition: prohibitions on disposing of assets. ### Section 192C of FSMA — Power to direct a qualifying parent undertaking - Under Section 192C, the PRA can: - direct the Group to seek a compromise with debtholders (e.g., debt/equity swap or ‘bail-in’) - block dividends from the Group to shareholders - direct that the group disposes of subsidiaries (fully or partially) - direct the group to support the U.K. subsidiary *Source: 1gbrea2022010 - Section 55P of FSMA enables the PRA to impose prohibitions and restrictions such as* ### Section 192D of FSMA provides that a requirement may be imposed which may require a ### 1gbrea2022010 - Section 192D of FSMA provides that a requirement may be imposed which may require a ### FSMA powers, FSCS coverage, and insurer defaults - Section 192D of FSMA can impose requirements on a parent undertaking to take or refrain from specific actions and may be imposed on its group or other members of its group. - FSCS protection prior to a 2014 review: - 90 percent of the claim due or, where there is no claim, 90 percent of the value of premiums paid under the contract of insurance. - Where insurance is mandatory, protection rises to 100 percent of the claim. - Post-2014 review protection increased to 100 percent for: - long-term insurance, - professional indemnity insurance, - claims arising from death or incapacity due to injury, sickness or infirmity of the policyholder, - buildings guarantee policies (due to consequences for policyholders and the housing market). - FSCS case load: - The FSCS is currently dealing with 39 general insurers in default and two life insurer defaults. - The failures date back as far as 1980 and are still live cases for the FSCS. - Since the beginning of 2016, the policyholders of five general insurers have required FSCS support. - Reference: FSCS insolvencies accessed on November 15, 2021. ### Resolution framework gaps and PRA capabilities - U.K. does not currently have a comprehensive resolution regime for insurers; assessment and planning for life and general insurers underway. - Resolution plans: - Being put in place for all U.K. IAIGs, but not all plans were in place at the time of the mission. - PRA identified need for resolution plans for all IAIGs but reprioritized due to the COVID-19 pandemic and has not consulted crisis management groups regarding the need for resolution plans. - Voluntary measures: - Evidence that IAIGs have voluntarily made changes to improve resolvability of their U.K. businesses, but these changes relied on voluntary agreement and lack clear legislative backing. - Legal-entity focus limits PRA: - PRA unable to take a group-wide approach to resolution; most powers are at legal entity level other than Section 192C and Section 192D of FSMA. - Lack of group-level powers is a major issue for U.K. observance of ComFrame CF12.7a. ### Specific powers lacking or constrained (identified gaps) - The following powers are not clearly conferred on U.K. authorities: - The power to prohibit payment of variable remuneration and to allow recovering of variable remuneration does not appear to be conferred explicitly (possible but untested coverage via section 55M of FSMA). - Power to sell or transfer the shares of an IAIG to a third party. - Ability to write down liabilities prior to insolvency (writing down currently only allowed once insolvency is established). - Powers to override rights of shareholders of the IAIG in resolution. - Powers to terminate, continue or transfer certain types of contracts, including insurance contracts and reinsurance contracts where parties are not regulated entities. - Powers to restrict or suspend policyholder rights of withdrawing their insurance contracts (contemplated in legislative change, but not currently conferred). - Ability to stay rights of reinsurers of a ceding insurer in relation to termination or non-reinstatement of coverage for periods after commencement of resolution. - Explicit powers to impose a temporary suspension of payments to unsecured creditors or impose a stay on creditor actions to attach assets or otherwise collect money or property from an IAIG. - No ability to establish a bridge institution. - No clear authority to take steps to provide continuity of essential services (such as annuity payments) and functions. - No clear authority to stay early termination rights associated with derivatives and securities financing transactions. ### Assessment and recommendations on insurer resolution - Assessment: Partly Observed. - Findings: - PRA has used existing exit strategies and FSCS support successfully for smaller firms and some insolvencies. - Under current section 377 of FSMA, courts cannot reduce the value of one or more of the insurer’s contracts before an insurer is insolvent, preventing write-downs prior to insolvency. - Proposed legislative changes (HMT consultation paper on May 20, 2021): - Amend the write-down power in section 377 of FSMA to make it available before insolvency, improve process, and extend FSCS protection to written-down amounts. - Apply to U.K. insurers but not the Society of Lloyd’s. - Aim to achieve a solvency run-off where continuity of cover with FSCS support is provided for protected policyholders, with the power used only where policyholders are not worse off than under the alternative of an insolvency. - Mission encourages HMT and the PRA to proceed with these proposals. - Recommendation: Develop a comprehensive insurer resolution regime with powers extending to heads of insurance groups and allowing for an entire group approach to resolution. ### ICP 13 — Reinsurance and Other Forms of Risk Transfer (summary) - Firms required to have effective risk-management systems covering reinsurance and other risk-mitigation techniques (PRA Rulebook, SII Firms, Conditions Governing Business, 3.1(2)(c)(vi); on-shored CDR Article 260(1)(g)). - Actuarial Function must express an opinion on the adequacy of reinsurance arrangements (PRA Rulebook, SII Firms, Conditions Governing Business – Actuarial Function, 6.1(h)). - Technical provisions must calculate amounts recoverable from reinsurance contracts and ISPVs, adjusting for timing and expected losses due to counterparty default (PRA Rulebook: Technical Provisions –11). - SCR calculation must allow for counterparty credit risk associated with reinsurance (PRA Rulebook, SII Firms, SCR – Internal Models, 11.8; SCR – Standard Formula, 3.12). - On-shored CDR Article 211(2) allows three types of reinsurance counterparties to be reflected in SCR calculations. - PRA Supervisory Statement SS20/16 expectations for boards: - Understand risk transfer, - Ensure economic impact of reinsurance is reflected in planning, capital setting and reserving, - Appreciate wider associated risks including concentration risk; additional requirements including stress testing. - Observed initiatives: - Joint Insurer Stress Tests with the Bermuda Monetary Authority in 2019 due to significant reinsurance placed into the Bermuda market. - Assessment: Observed. - Comment: Comprehensive requirements exist but scope to simplify and streamline diverse sources of requirements. ### ICP 14 — Valuation (summary) - Valuation generally follows IFRS where consistent with arm’s length market value; contingent liabilities recognized if material. - Key rules and articles referenced: CDR articles 9, 17, 18, 10, 19-21, 22-26, 264, 265; PRA rulebook Valuation and Technical provisions rules. - Technical provisions = best estimate + risk margin; best estimate = probability-weighted average (expected present value) using relevant risk-free term structure. - Discount rates: - Until December 2020 firms used EIOPA risk-free rates. - PRA publishing rates since then and transitioned GBP rates to SONIA in July 2021. - JPY rates expected by end-2021; work on USD planned for 2022. - Long-term guarantee measures and transitionals: - Transitionals phased out by 2032; supervisors assess capability to cover SCR without transitionals by end of transition period. - Matching adjustment (MA): - Approval subject to Regulation 42 conditions; PRA allows aggregate replication of cash flows. - PRA found MA functioned as intended during COVID-19; reminded firms not required to sell downgraded assets as long as MA portfolio complies with Regulation 42. - Quantified impacts as of end-2020: - 18 solo entities applied the MA. Without the MA: - value of technical provisions would be GBP 42bn higher (+3 percent). - SCR would be higher by 44bn (+60 percent). - eligible own funds to meet the SCR would be lower by 37bn (-32 percent). - TMTP used by 22 firms. Without the TMTP: - value of technical provisions would be GBP 27bn higher (+2 percent). - eligible own funds to meet the SCR would be lower by 21bn (-18 percent). - SCR would be higher by 3bn (+4 percent). - IFRS 17: - Effective for annual reporting periods beginning on or after 1 January 2023. - PRA monitors implementation and engages with insurers and auditors on operational challenges. - Assessment: Observed. - Comment: Framework robust and PRA attentive to MA and TMTP; maintain high standards for MA asset eligibility and monitor IFRS 17 implementation closely. ### ICP 15 — Investments (summary) - PRA Rulebook: Solvency II Firms: Investments establishes the Prudent Person Principle (General Principle 2.1). - Requirements: - Firms must invest in assets they can properly identify, measure, monitor, manage and report. - Assets must ensure security, quality, liquidity and profitability; assets covering technical provisions must be appropriate to nature and duration of liabilities (PRA Rulebook Investment provisions 3.1). - PRA Supervisory Statement 1/20 sets expectations for investment strategy, governance, investments in unregulated markets, and intragroup participations. - No quantitative investment limits imposed by PRA; expects firms to set internal limits. - ComFrame requirements in ICP 15 met by investment requirements applying at group level. - Assessment: Observed. - Comment: Principles-based approach appropriate; PRA focuses on governance and higher-risk investments (e.g., matching adjustment portfolios). ### ICP 16 — Enterprise Risk Management for Solvency Purposes (summary) - Conditions Governing Business 3.1 requires effective risk-management systems covering identification, measurement, monitoring, management and reporting of risks. - On-shored CDR Article 259 requires a risk management system with risk strategy, decision-making, written policies and tolerance limits; stress tests and scenario analysis required where appropriate. - ORSA requirements: - PRA Rulebook Solvency II Firms: Conditions Governing Business 3.8-3.11 requires ORSA including overall solvency needs, performed regularly and after significant change; on-shored CDR Article 306(c) mandates ORSA content. - PRA Supervisory Statement SS19/16 expands expectations for ORSA supervisory report, policy, Board sign-off, stress testing and linkage to internal models. - Liquidity and ALM: - On-shored CDR Article 260(1)(b) requires ALM policy; SS5/19 expects insurers consider reinsurance payments for liquidity needs. - SS4/18 sets expectations for risk appetite statements; SS5/19 sets PRA liquidity expectations including contingency plans. - ComFrame-related gaps noted (CF16.7a, CF16.7b, CF16.7c, CF16.7e, CF16.9d, CF16.12a/b and others) around explicit group-wide requirements, data quality, reporting, and ORSA coverage of fungibility and aggregate exposures. - Assessment: Largely Observed. - Comments and recommendations: - PRA’s principles-based regime broadly addresses ComFrame standards but some detailed IAIG-specific requirements are not explicitly met. - Regulatory Initiatives Grid plans to require liquidity management plans from certain insurers; mission supports extension to all IAIGs. - PRA should develop regulations or guidance to address relationship between ALM policies and product development, pricing functions and investment management (ICP 16.5). ### ICP 17 — Capital Adequacy (summary) - Solvency II total balance sheet approach on-shored post-Brexit: market valuation, own funds, SCR definition; Fundamental Rules require prudent conduct and adequate financial resources. - Capital requirements: - MCR calibrated to a value-at-risk confidence level of 85 percent over a one-year period (PRA Rulebook, SII Firms, MCR sections 2 and 3). - SCR calibrated to a value-at-risk confidence level of 99.5 percent over a one-year period (PRA Rulebook, SII Firms, SCR sections 2 and 3). - Supervisory expectations (SS4/18): insurers’ risk appetite should include capital levels to maintain in reasonably foreseeable market conditions (implicit expectation capital held above 100 percent of SCR). - Breach procedures: - On breach of SCR: - immediately inform PRA when SCR non-compliance observed or at risk within next three months, - within two months submit realistic recovery plan for PRA approval, - take measures to re-establish compliance within six months (or longer if PRA determines). - On breach of MCR: - inform PRA immediately when MCR non-compliance observed or at risk within next three months, - within one month submit short-term realistic finance scheme for PRA approval to restore within three months. - Sections 55J and 55KA FSMA empower PRA to withdraw permission to enter new business or continue to administer existing business if benefit to policyholders. - Proactive Intervention Framework (PIF) with five stages of risk and maintained PIF score for each firm. - Group capital requirements: - Insurance groups must ensure eligible own funds available in the group at least equal to the group SCR; minimum group SCR rules apply (PRA Rulebook, SII Firms, Group Supervision sections 4 to 15). - Calculation and models: - SCR via approved internal model (partial/full) or standard formula. - SCR must cover non-life underwriting, life underwriting, health underwriting, market risk, credit risk and operational risk (PRA Rulebook SII Firms SCR General provisions 3.3). - Standard formula aggregation: variance-covariance with pre-defined correlations (on-shored CDR Article 87). - Internal models subject to Statistical Quality Standards, Calibration Standards, Use Test, Profit & Loss Attribution, Validation, Documentation, External Models and Data requirements. - PRA monitors model drift and requires standard formula comparison reporting (SS25/15; SS15/16). - PRA can impose capital add-ons for deviations or governance deficiencies. - Eligible own funds and instruments: - Three tiers based on loss absorbency; rules on recognition, ring-fenced adjustments, participations, AOF notification 30 days before issuance and formal approval for AOF recognition (published on PRA website). - Internal model governance and supervisory statements (SS5/15, SS17/16, SS3/17, SS8/18, SS9/18) address specific modelling areas. - Data and validation: - Data accuracy and annual updates required for internal model datasets. - Assessment: Observed. - Comments: - Framework robust and adequate; widespread internal model use monitored via national reporting templates. - Continued exchange on internal model supervision with EIOPA and IAIS recommended post-Brexit. ### ICP 18 — Intermediaries (summary) - Insurance distribution activities regulated by the FCA; intermediaries are solo-regulated firms under FCA prudential supervision. - FCA Perimeter Guidance manual (PERG 5) defines insurance distribution activities; FSMA licensing required for such activities. - FCA regulatory layering: - High Level Standards: Principles for Businesses Sourcebook (PRIN) and Threshold Conditions (COND). - Prudential requirements for intermediaries in MIPRU: capital resources, professional indemnity insurance, allocation of responsibility to a director or senior manager. - Senior Managers & Certification Regime (SM&CR) extended to insurance intermediaries in December (date truncated in source). *Source: 1gbrea2022010* ### 2019. This is described in relation to ICP 5. ### 1gbrea2022010 - 2019. This is described in relation to ICP 5. ### Training, competence, and governance - The FCA’s training and competence regime consists of the 'competent employees rule' contained in SYSC (Senior Management Arrangements Systems and Controls sourcebook) in the FCA Handbook. - The Training and Competence sourcebook contains more detailed requirements for certain retail activities and the need to have an appropriate qualification where necessary. - The competent employees rule requires that insurance intermediaries must employ personnel with the skills, knowledge, and expertise necessary for the discharge of the responsibilities allocated to them. - SYSC sets out requirements for systems and controls and general organizational requirements including governance arrangements within firms. - The Code of Conduct (COCON) sets out rules for conduct of specified staff and is supplemented by the Training and Competence chapter of the FCA Handbook. ### Client assets and prudential supervision of intermediaries - Principle 10 (Clients' assets) of FCA’s Principles for Businesses requires a firm to arrange adequate protection for clients' assets when the firm is responsible for them. - Client Assets Sourcebook CASS 5 sets out the rules for firms who handle client monies; segregated client money held in separate client accounts is protected under trust arrangements (statutory or non-statutory trust). - Non-statutory trust arrangements provide extra flexibility but require additional controls and reporting obligations to the FCA. - The FCA applies ongoing supervision to insurance intermediaries, using both fixed firm and flexible firm supervision. - Example supervisory activity: thematic review into the General Insurance distribution chain resulting in FG19/5 The GI distribution chain: Guidance for insurance product manufacturers and distributors. - During the COVID-19 pandemic the FCA carried out intensive monitoring of the liquidity positions of general insurance brokers subject to fixed firm supervision as part of prudential supervision for intermediaries. - Assessment: Observed - Comments: Intermediaries are subject to a comprehensive set of prudential and conduct requirements. FCA supervision described in ICP 9 is comprehensive. With respect to intermediaries both fixed firm and flexible firm supervision is applied. ### ICP 19 — Conduct of Business: framework and rules - The supervisor requires that insurers and intermediaries treat customers fairly before contract entry and through contract fulfilment. - The FCA's Approach to Consumers sets vision and indicators for well-functioning markets; conduct requirements derive from Principles for Businesses, high-level rules, detailed rules and guidance in the FCA Handbook. - Relevant conduct sourcebooks: - Conduct of Business Sourcebook (COBS) — life business or designated investment business. - Insurance Conduct of Business Sourcebook (ICOBS) — general insurance business and pure protection insurance business. - High-level Principles (PRIN 2.1) applicable to insurers and intermediaries: - Principle 2: conduct business with due skill, care, and diligence. - Principle 5: observe proper standards of market conduct. - Principle 6: pay due regard to interests of customers and treat them fairly. Detailed requirements in COBS 2.1.1R (1), ICOBS 2.5.1 R, and COBS 20.2; Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD). - Principle 7: communicate information clearly, fairly, and not misleadingly (detailed in ICOBS and COBS). - Principle 8: manage conflicts of interest fairly; SYSC 10 and SYSC 3.3 require reasonable steps to identify and prevent conflicts of interest. - Principle 9: take reasonable care to ensure suitability of advice and discretionary decisions; multiple requirements on advised sales in ICOBS and COBS. - Implementation of Insurance Distribution Directive (IDD): - IDD took effect on 1 October 2018 and was implemented via Chapter 4 of PROD in the FCA Handbook (PROD 4). - PROD 4 applies to new products or significant adaptions made after October 1, 2018. - As a result of the General Insurance Pricing Practices Market Study, PROD 4 requirements were extended from 1 October 2021 to all general insurance and pure protection products regardless of when they were manufactured. - Under PROD 4, manufacturers must: - identify a target market; - ensure product consistency with objectives, needs and characteristics of the target market; - carefully select distribution channels appropriate for the target market; - make relevant information about the target market available to distributors; - take reasonable steps to ensure the product is distributed to the identified target market. - Complaints handling: DISP in the FCA Handbook sets out requirements; DISP 1 requires insurers and intermediaries to inform customers of rights to escalate to the Financial Ombudsman Service. Firms meet case fee costs; Financial Ombudsman Service is funded via an annual levy paid by authorized firms. - Data protection: Firms must comply with Data Protection Act 2018 (DPA 2018) and U.K.-GDPR; U.K. Information Commissioner’s Office (ICO) regulates compliance. DPA 2018 and U.K.-GDPR are principles-based regimes referencing appropriate ‘technical and organizational measures’. - FCA publishes thematic review findings, consumer complaints data, value measures on general insurance contracts, enforcement action, consumer guidance related to Brexit, and warning notices about unauthorized firms and scams. - Assessment: Observed - Comments: The U.K. has a robust and comprehensive framework for regulation and supervision of conduct of business by insurers. The legal framework is an extremely dense and intricate web of requirements that are complex to navigate, leaving open the possibility for significant streamlining in the future. ### ICP 20 — Public Disclosure and SFCR requirements - Disclosure requirements are met by multiple sources; since Solvency II implementation, the annual Solvency and Financial Condition Report (SFCR) provides structured disclosure for U.K. regulated insurers within Solvency II scope. - Insurers must produce audited financial statements under U.K.-IFRS or U.K. GAAP; Companies Act 2006 (CA2006), Part 15 sets requirements for annual accounts: balance sheet, profit and loss account, notes to accounts (Section 396 and 404), strategic report and directors report. - IFRS 17: Subject to U.K. endorsement a new insurance standard (IFRS 17) will be introduced for IFRS firms from 2023; IFRS 17 has more detailed and comprehensive disclosure requirements than IFRS 4. - Listed insurers subject to Listing Rules and Disclosure Guidance and Transparency Rules Sourcebook. - Branches: Overseas Companies Regulations (2009) Part 6 apply to branches in the U.K.; accounting documents delivery and inspection rules described. - All insurers within Solvency II scope are designated ‘Public Interest Entities’ with additional audit requirements including an extended audit report. Annual reports must be audited under CA2006 part 16 except in limited circumstances (e.g., dormant, CA2006 475). Auditor duties include opinions on true and fair view and consistency of strategic report (CA2006 sections 495 and 496). - SFCR principles and audit: - All U.K. Solvency II firms (including Lloyd’s) must disclose an SFCR annually (PRA Rulebook, Reporting Rule 3.1). - SFCR must reflect the nature, scale, and complexity of the firm; be accessible, complete in all material respects, comparable and consistent over time; and be relevant, reliable, and comprehensive. - PRA requires firms meeting certain criteria to obtain an audit opinion on key SFCR elements; external auditor must undertake a reasonable assurance engagement and produce a report addressed to the governing body confirming relevant elements are prepared in all material respects in accordance with PRA rules and Solvency II Regulations. - PRA Supervisory Statement (SS11/16) and FRC Practice Note 20 provide guidance about expected level of assurance on quantitative SFCR elements. PRA rules require certain Quantitative Reporting Templates (QRTs), including the balance sheet, to be subject to audit review. - SFCR contents (Solvency II CDR articles 290–303; further info articles 359–371; EIOPA guidelines applicable post-EU exit): - QRTs required include: Balance sheet; Premiums claims and expenses by line of business and by country; Technical provisions (non-life, life, health); Insurance claims information; Impact of long-term guarantee and transitional measures; Own funds; Solvency capital requirement; Minimum capital requirement. - Mapped ICP 20.2 content to SFCR annex references (examples): - Company Profile → A.1 Business - Corporate Governance Framework → B. System of Governance - Technical Provisions → D.2 Valuation for Solvency Purposes – Technical Provisions - Insurance Risk Exposure → C. Risk Profile – Underwriting risk - Financial Instruments and other investments → D.1 Valuation for Solvency Purposes – Assets - Investment Risk exposure → C1–C3 Risk Profile – Market risk, credit risk, liquidity risk - Asset-liability management → Part of Risk Profile - Capital adequacy → E Capital management - Liquidity risk → C.4 – Risk profile – liquidity risk - Financial performance → A.2–A.5 (Underwriting, Investment, Other activities, Any other information) - Disclosure requirements specifics: - Company profile disclosures required by Article 293 (ownership, lines of business, significant events, risk management system description). - Governance and risk management disclosures required by Article 294 and PRA Reporting Rule 3.3 (system of governance description and adequacy assessment), including management body structure, material changes, remuneration policy, fit and proper policy, actuarial function, outsourcing policy, assessment of adequacy. - Technical provisions disclosures per Article 296(2) and templates S.12.01, S.17.01; include valuation bases, methods, key assumptions, discount rates, matching and volatility adjustments and quantification of impact of changes to zero of matching adjustment (Rule 3.4(1)) and disclosure for volatility adjustment (Rule 3.4(2)). EIOPA Guideline 8 requires disclosure of significant simplified methods. - Insurance risk exposures: Article 295 requires quantitative and qualitative information; QRTs S.25s collect information on each material risk category annually; disclosure of off-balance sheet positions and transfers to special purpose vehicles (Article 295(2)); risk management disclosure requirements include actions on pricing and provisioning, data sufficiency and quality, and claims management adequacy. - Reinsurance disclosure: QRTs (e.g., s.05.01.02 and s.17.01.02) show premiums, claims and reinsurance recoverables on gross and net basis by product. - Material risk concentrations disclosure required by Article 295(3). - Financial instruments and investments: Article 296(1) requires valuation information for each material class of assets, with qualitative and quantitative explanation of differences to financial statement valuations; QRT S.02.01.02 shows balance sheet with investments by class. EIOPA Guidelines 6 and 7 provide additional expectations for aggregated asset classes and valuation details. - Investment risk exposure: Article 295 requires description of measures, material risks, prudent person principle, material concentrations, mitigation techniques, stress testing and sensitivity analysis, and other material information. - Asset-liability management: PRA Rulebook Conditions Governing Business Rules 2.5 and 3.1 and Article 260 require disclosure of structural mismatches, dependencies between risks, off-balance sheet exposures, and effects of risk-mitigating techniques. Risk sensitivity analyses are required (Article 295(6)). - Capital adequacy: Article 297 requires disclosure on objectives, policies and processes for managing own funds; analysis of each tier of own funds; eligible amounts to cover SCR and MCR by tier; SCR and MCR amounts and splits; information on simplified calculations, undertaking-specific parameters, inputs used to calculate MCR, material changes to SCR and MCR. Internal model disclosures requirements set out in Article 297(4). - Liquidity risk: Article 295 and Article 295(5) require qualitative and quantitative information including total amount of expected profit included in future premium. - Financial performance: Solvency II templates require breakdown of premiums, claims and expenses by line of business and by country (S.05.01.02, S.05.02.01); SFCR must include qualitative and quantitative information on underwriting performance (Article 293(2)), investment performance (Article 293(3)), and other material income and expenses (Article 293(4) and (5)). Claims development triangles required in S.19.01 (default run-off triangle length 10+1 years but disclosure based on undertaking's claims development). - Pricing adequacy: information on sources of profit and S.05.02 requirement for premiums, claims, and expenses by business line and by country assist assessment. - Non-GAAP financial measures: IOSCO and ESMA guidance on alternative performance measures (APMs) published; ESMA guidance referenced in FCA Handbook and on FCA website as non-legislative material. - FRC responsibilities: sets U.K. Corporate Governance and Stewardship Codes, U.K. standards for accounting and actuarial work; monitors corporate reporting quality; as Competent Authority for audit sets auditing and ethical standards and monitors/enforces audit quality; responsible for monitoring compliance with ESMA Guidelines and considers them when reviewing company reports for fair, balanced, and comprehensive reporting. - Assessment: Observed - Comments: Solvency II introduced extensive disclosure requirements fully in line with ICP 20, in particular via SFCR and harmonized QRTs. Additional disclosure requirements under Companies Act and Listing rules apply. It is noted that the PRA does not systematically monitor the requirement of SFCRs being audited. ### ICP 21 — Countering Fraud in Insurance - The supervisor requires insurers and intermediaries to deter, prevent, detect, report and remedy fraud. - FCA and PRA are not lead competent authorities for insurance counter fraud activities in the U.K. - Responsibility for detecting, preventing, and prosecuting fraud is spread across U.K. authorities: Serious Fraud Office; National Economic Crime Centre (NECC, of which the FCA is a member); City of London Police’s Insurance Fraud Enforcement Department (IFED); Department for Business, Innovation and Skills; Crown Prosecution Services; National Police Chiefs Council; Crown Office and Procurator Fiscal Service; Public Prosecution Service for Northern Ireland; Association of Chief Police Officers in Scotland. - Industry and cooperative initiatives: - Insurance industry has established and funds IFED and the Insurance Fraud Bureau (IFB). - The FCA has a MoU with the IFB. - Established fraud databases and data sharing schemes include Insurance Fraud Register (IFR), Claims and Underwriting Exchange (CUE) and MyLicence. - Substantial police work funded by the Association of British Insurers (ABI) and Lloyd’s of London. - The Insurance Fraud Taskforce (IFT) was set up in January 2015 and reported in January [text truncated in source]. - Assessment: Observed *Italic: Source — 1gbrea2022010 - 2019. This is described in relation to ICP 5.* ### 2016. The members were representative of trade bodies representing different parts of ### UNITED KINGDOM ### Insurance fraud: industry and government response - Timeline and oversight: - 2016: Panel composed of trade bodies representing different parts of the insurance sector, the Financial Services Consumer Panel, and the Financial Ombudsman Service; supported by HMT and the Ministry of Justice; private sector-led. - 2017: A progress report was published that included initiatives to implement recommendations by the FCA and industry bodies. - Fraud types addressed: - Claims fraud - Application fraud - Opportunistic fraud - Organized fraud - Legal remedies: - Insurance Act 2015 sections 12 and 13 provide remedies for insurers due to fraudulent insurance claims. - Assessment: - There is a network of legislation, authorities and industry funded bodies working together to address insurance fraud in the U.K. - The industry and authorities are aware of the four main types of insurance fraud and developed recommendations to address each type. ### FCA role, powers, and supervisory expectations - FCA role: - The FCA is not the lead competent authority for insurance counter fraud activities in the U.K., but it has powers to act against various offences and an oversight role of firms’ ability to handle fraud. - The FCA assesses potential fraud risk on an ongoing basis and, where weaknesses are identified, takes necessary action to ensure firms undertake remedial work. - The FCA works with industry trade bodies to encourage and maintain an industry approach to counter fraud and raise awareness of fraud activity. - The FCA plays an active role in combating fraud through coordinated activities with the National Economic Crime Centre (NECC); the FCA is a member of the NECC and has seconded staff to work in the NECC. - Where appropriate, the FCA’s Unauthorised Business Department (UBD) takes enforcement action against firms and individuals not authorized or exempt under FSMA and liaises with relevant external counter fraud agencies. - Statutory and criminal powers (as granted under U.K. legislation): - To institute proceedings for offences under FSMA and legislation made under FSMA (examples: breach of restrictions on financial promotions, performing functions in breach of contravention order etc.). - Note: Under S401 of FSMA the FCA is the appropriate regulator to institute proceedings. - To institute proceedings under Part 7 of the Financial Services Act 2012 (examples: making a false or misleading statement etc.). - To prosecute crimes under s327 (concealment) and s328 (arrangements) of the Proceeds of Crime Act 2002 (POCA). - To prosecute offences under the Fraud Act 2006 which makes provision for criminal liability for fraud and obtaining services dishonestly. - Supervisory expectations and Handbook requirements: - Under Principle 11 of the FCA Handbook, firms are expected to report material cyber incidents or other suspected fraudulent activity. - The FCA’s Handbook includes a guide to countering financial crime, including a specific chapter relating to fraud. - SYSC 3.2.6R of the FCA Handbook requires firms to establish and maintain effective systems and controls to prevent the risk that they might be used to further financial crime. - The broad requirements of the FCA Principles for Business and Threshold Conditions speak to the need for insurers to put in place processes to minimize insurance fraud. ### AML/CFT supervision for insurers - International assessment and national risk: - FATF Mutual Evaluation Report (MER) on the effectiveness of the U.K.’s AML/CFT regime published in December 2018. - 2020 National Risk Assessments (NRA) reflect a robust understanding of ML/TF risks. - NRA observation on insurance sector: the insurance sector in the U.K. is at low ML/TF risk, with the NRA noting: - "This is likely because the design of both general and life insurance products makes it difficult and unattractive for criminals to layer the proceeds of crime at speed. Criminals also have to provide significant personal information to inform an insurer’s risk-based assessment during on-boarding, which may be a further deterrent. The international nature of the London insurance market increases the sector’s exposure to providing cover in high-risk jurisdictions, trades or industries." - Legal and supervisory scope: - The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘the MLRs’) are applicable to insurers and intermediaries who carry out or effect contracts of long-term insurance. - Long-term insurance is defined in Part 2 of Schedule 1 to The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 and includes life insurance policies. - Approximately 1,200 insurers are in the scope of the MLRs and supervised by the FCA for AML/CFT compliance. This represents 5 percent of the FCA’s overall supervisory population. - HMT and Home Office’s 2020 NRA found that the insurance sector is unattractive for money laundering. The FCA contributed to the NRA exercise. - The international AML/CFT standards focus on ML/TF risks from life insurance and other investment-related insurance; accordingly, the U.K. MLRs define financial institutions with AML/CFT obligations to include those persons authorized by FSMA to carry out or effect any contract of long-term insurance. - FCA responsibilities under the MLRs: - Regulation 7(1)(a) of the MLRs appoints the FCA as the supervisory authority for monitoring the compliance of credit and financial institutions authorized under the FSMA with the obligations set out in the MLRs, including those that carry out or effect any contract of long-term insurance. - Regulation 17 of the MLRs requires the FCA to identify and assess the international and domestic ML/TF risks to which its supervised population are subject. - Regulation 46 of the MLRs requires the FCA to effectively monitor its supervised population to ensure compliance with the MLRs following a risk-based approach informed by Regulation 17 risk assessments. - Regulation 47 of the MLRs requires supervisory authorities to make up to date information on AML/CFT available to those it supervises. - Firm-level obligations: - The FCA requires all authorized firms to have systems and controls in place to mitigate the risk that they might be used to commit financial crime including, but not limited to, money laundering. - These obligations are set out in SYSC 3.2.6/6.1.1 of the FCA’s handbook and apply to all insurers authorized by the FCA. *International Monetary Fund — United Kingdom sections (excerpts).* ### Part 9 of the MLRs provides the FCA with enforcement powers and sets out that failure ### 1gbrea2022010 - Part 9 of the MLRs provides the FCA with enforcement powers and sets out that failure ### Enforcement powers, guidance, and industry engagement - Part 9 of the MLRs gives the FCA enforcement powers and sets out that failure to meet requirements under the MLRs can result in civil penalties and notices or criminal charges. - The FCA also has relevant powers under FSMA as detailed elsewhere in this detailed assessment. - Where the FCA finds significant failings or serious misconduct in a firm it can use the range of regulatory tools listed to ensure these are rectified. - The FCA communicates expectations of financial crime controls through speeches by FCA Executives, the FCA’s Annual Report, the FCA Financial Crime Guide for firms, and regular updates on the FCA’s website. ### AML/CFT cooperation, taskforces, and guidance - The FCA participates in the Joint Money Laundering Intelligence Taskforce (JMLIT), whose remit has expanded to include the insurance sector; JMLIT is part of the NECC. - JMLIT consists of over 40 financial institutions, the FCA, Cifas, and five law enforcement agencies (National Crime Agency, Her Majesty’s Revenue and Customs, Serious Fraud Office, the City of London Police, and the Metropolitan Police Service). - The FATF mutual evaluation cited JMLIT as a key strength because it facilitates exchange of strategic and tactical intelligence between government agencies and private sector stakeholders with AML/CFT obligations. - The Joint Money Laundering Steering Group (JMLSG) produces industry guidance for financial services firms within the FCA’s remit, including insurers; JMLSG guidance is subject to Treasury Ministerial approval after advice from the FCA. - POCA 2002 and the Terrorism Act 2000 require courts to take account of industry guidance approved by an HMT minister when considering offences; the MLRs require courts to decide whether industry guidance was followed in assessing compliance with MLRs. - The FCA Handbook SYSC 3.2.6E and DEPP 6.2.1 (4) state that the FCA will take into account FCA-confirmed Industry Guidance in deciding whether to take action. ### FCA data collection, analytics, and REP-CRIM - The FCA is developing and implementing new analytical tools to identify the effectiveness of firms’ systems and controls using large amounts of data as part of the FCA’s 2020 data strategy (implementation phase; not directly assessed in this mission). - In 2016, the FCA introduced the annual financial crime data return (REP-CRIM), gathering information on AML controls from over 2,000 firms (including 115 firms in the insurance sector) to identify inherent AML risks and target supervisory work. - The FCA decided to extend REP-CRIM to approximately 7,000 firms in total to deter overall AML market risks and widen coverage across firms. - FATF found in the 2018 Mutual Evaluation that the FCA cooperates closely with foreign counterparts, including through an extensive secondment program and participation in ML/TF regional networks and groups (e.g., FIN-NET, Basel Committee’s AML Expert Group). ### Assessment of AML/CFT in the insurance sector - Assessment: Observed - Comments: - The U.K.’s AML/CFT regime was highly rated by the FATF in the 2018 MER. - The insurance sector posed generally lower ML/TF risk and resources applied appear suitable to identified risks. - The mission found an adequate approach to ML/TF risks in the insurance sector, evidence of proactive supervision, and significant involvement by the supervised sector in creation and implementation of regulation. - Outsourcing of guidance development to JMLSG is acceptable given HMT Ministerial approval after FCA advice; industry ownership and acceptance of guidance may be beneficial. ### ICP 23 — Group-wide Supervision: scope, identification, and expectations - The group-wide supervisor, in cooperation and coordination with other supervisors, identifies the insurance group and determines scope of group supervision. - The PRA identifies insurance groups and legal entities based on: - S192B of FSMA (definition of “qualifying parent undertaking”) - S421 of FSMA (definition of “group”) - PRA rule 2.3 (limited circumstances to exclude entities from group supervision) - PRA rulebook expectations for U.K. Solvency II group supervision scope include groups where: - a U.K. Solvency II firm is a participating undertaking in at least one other U.K. Solvency II firm, third-country (re)insurance undertaking; or - the parent undertaking of a U.K. Solvency II firm is an insurance holding company or a mixed financial holding company with head office in the U.K. or Gibraltar; or - the parent undertaking of a U.K. Solvency II firm is an insurance holding company or a mixed financial holding company without head office in the U.K. or Gibraltar or is a third-country (re)insurance undertaking; or - the parent undertaking of a U.K. Solvency II firm is a mixed activity insurance holding company. - The PRA expects inclusion of all entities in insurance group scope, regulated or not, except in limited circumstances where exclusion is appropriate or negligible for objectives of group supervision. - Applications to exclude entities are assessed case-by-case and, if approved, effected by direction under section 138A of FSMA. - PRA decision criteria include impact on supervision ability, potential for hiding risk, and risk of misleading group capital picture. - PRA uses PRA Rulebook “parent undertaking” definition for Solvency II Firms Sector to identify head of group; control defined across eight numbered points (1)–(8) in the source text. ### PRA group-level reporting and activities on behalf of groups - For a group where the PRA is group supervisor, one undertaking may undertake on behalf of the group to: - submit relevant data for and results of group eligible own funds and group SCR to the PRA; - ensure ongoing compliance with conditions for prudent management of subsidiaries, including single document production for ORSAs and single SFCR when agreed; - inform the PRA in event of non-compliance with the group SCR within appropriate timeframe; - submit a recovery plan and take measures to ensure compliance with the group SCR in event of non-compliance within appropriate timeframes. ### Interaction between PRA and FCA on group supervision - Competencies for financial conglomerates supervision are split: PRA for insurance- and banking-led conglomerates; FCA for investment management-led conglomerates. Where roles overlap, internal coordination occurs. - The FCA is not a group-wide supervisor for any insurance group but is an involved supervisor on aspects of control and follows processes in ICPs 4, 5, and 6. - The FCA supports group-wide supervisors under MoUs and signs Coordination Arrangements and cooperation agreements among Crisis Management Group Members. ### ComFrame and IAIG identification - On 28 May 2020 the PRA published the list of IAIGs headquartered in the U.K., comprising Aviva plc, Legal & General Group Plc, British United Provident Association Limited, and RSA Insurance Group plc. - The PRA identified IAIGs in accordance with ComFrame criteria (CF 23.0.a and CF 23.0.b) for Insurance Capital Standard (ICS) version 2.0 and used principles in section 3B(1)(a), (b), and (f) of FSMA, emphasizing proportionality, transparency, and efficient resource use. - The PRA adopted a conservative approach imposing a higher threshold to opt a firm out than in; the PRA did not opt-out any firms and opted-in two firms based on international footprint and proximity to IAIG size criteria. - PRA keeps IAIG decisions under constant review and reviews IAIG status as part of firm-specific PSM discussions. - Footnote: Since then, RSA was acquired and delisted, and it was no longer considered as an IAIG at the time of the mission. ### Assessment of group supervision framework - Assessment: Observed - Comments: Framework determined by Solvency II is robust; PRA expectations on group-related issues are set out in supervisory statements; IAIG identification was transparent and regularly reviewed. ### ICP 24 — Macroprudential Supervision: monitoring, data, and stress testing - The supervisor identifies, monitors, and analyses market and financial developments and environmental factors to identify vulnerabilities and address build-up/transmission of systemic risk at insurer and sector levels. - The PRA aims to identify risks insurers may generate for financial stability and works with the Financial Policy Committee (FPC) on potential mitigating measures. - FPC functions include monitoring stability, identifying systemic risks, and giving directions to PRA or FCA to implement macroprudential measures; FPC publishes Financial Stability Reports containing its views and assessments. - The Financial Stability Report occasionally mentioned the insurance sector but has no regular sector-specific section; the last FPC deep-dive into insurance sector risks was in 2016. - Since 2016 the PRA conducted analyses on: - Procyclicality, incentives to fire sale, and spillovers by holding similar assets; - Investment risks from illiquid assets or fallen angels; - Reinsurance and interconnectedness with other financial sectors. - Noted data gaps remain despite Solvency II expanding supervisory reporting, particularly in: - liquidity risk (absence of short-term cash flow data; inconsistent reporting of cash and cash equivalents); - derivatives data (needs enhancement and quality checks to monitor margin call risks); - cross-border business and intermediation channels (limited data complicates assessment of Lloyd’s substitutability and systemic relevance). - Insurance intermediaries’ liquidity reserves have been collected only ad-hoc during the pandemic, using PRA competence under S165A of FSMA to collect data for systemic risk analysis. - The BoE expanded stress testing beyond banking; during the pandemic PRA carried out additional stress tests of largest life and general insurers and published aggregated results in June 2020 showing sector robustness to downside stress. - PRA/BMA joint stress test in 2019 examined cross-border interplay between primary insurers and Bermuda reinsurers in natural catastrophe scenarios. - The PRA has not designated any insurer as systemically important but integrates potential systemic importance in microprudential supervision and resolvability assessments. - Aggregate market statistics were temporarily unavailable after EIOPA ceased U.K. statistics inclusion; PRA launched a new statistics portal in December 2021 to remedy this. ### Macroprudential assessment and recommendations - Assessment: Largely Observed - Comments and suggested enhancements: - Macroprudential supervision could be enhanced through more structured and regular consideration of insurance sector systemic risk. - Regular reporting by the PRA Insurance Directorate on broad trends with near-term or long-term consequences is recommended. - A process inspired by the IAIS Global Monitoring Exercise (GME), implemented domestically and tied to qualitative input for the GME, may be appropriate. - The Bank of England should undertake a deep dive review of the role and potential systemic relevance of Lloyd’s and the London Market internationally, in cooperation with other supervisors, focusing on substitutability and market share. ### ICP 25 — Supervisory Cooperation and Coordination (colleges, crisis arrangements, and information sharing) - PRA supervisory stance for insurance groups is determined by Solvency II Regulations 2015: - Regulation 26: where an insurance undertaking authorized by PRA is part of a group, the PRA is the group supervisor and must supervise that group. - Regulation 28: where group is headquartered in an equivalent third-country, PRA will rely on third-country group supervision. - In absence of third-country equivalence at ultimate parent level, the PRA can apply Solvency II group provisions or “other methods” to ensure appropriate supervision; default is for U.K. firms to ensure compliance with full Solvency II worldwide. - PRA duties as group supervisor include determination of scope, leadership/coordination of group-wide activities, aggregation/preparation/analysis of group-wide information, group-wide supervisory assessments, coordination of information sharing, coordination on group-wide issues (preventive/corrective measures and sanctions), identification of gaps, and chairing supervisory colleges or suitable coordination arrangements. - Most U.K. groups have supervisory colleges underpinned by coordination agreements; where no college exists, PRA sets out bilateral coordination arrangements. - PRA principles for coordination arrangements: - If group is an IAIG, PRA must organize an International College. - An International College is optional for other groups but should be organized when it provides value, e.g., Cat 1 or 2 group; about 10 percent or more of liabilities written abroad; highly capital intensive or loss-making business abroad; significant intra-group transactions; complex group structure; use of an internal model; relationships with third-country regulators; shared central services; impact of climate change on overseas entities. - If active in one other jurisdiction, bilateral meetings may suffice. - If group primarily conducts non-insurance business in a jurisdiction, participation of supervisors from that jurisdiction in the International College is not necessary though bilateral engagement may occur. - College coordination agreements provide emergency planning and information exchange protocols for crises, including specific triggers (non-compliance with group SCR, major legal/governance violations, liquidity problems, insolvency risk, major downgrades, macroeconomic/sector developments, IT breakdown). - As an involved supervisor the PRA: - actively participates in group supervision and colleges; - informs group-wide supervisor of material findings; - shares all relevant information to assist group-wide supervision; - analyzes and cooperates on decision-making and enforcement; - assists in supervisory processes and identifies gaps; - shares information on license status, location of significant business, legal structure developments, business model changes, Board/Senior Management changes, risk management systems, significant operational or financial developments. - FCA role: - FSMA strategic objective: ensure relevant markets function well, necessitating cooperation with other supervisors. - FCA works closely with international regulators and IAIS; supervisors encouraged to be proactive in engaging with colleges and raising conduct risk. - Where PRA is group supervisor and FCA dual-regulates a U.K. insurer: PRA/FCA internal college needed to agree matters to take to Group College and agree U.K. vote (U.K. has one vote at Group College). - Where FCA is solo supervisor of an entity in group: FCA invited to attend college as full member. - Supervision teams expected to hold at least one domestic college annually for all firms (fixed firms: individual colleges; flexible portfolio firms: peer group/cluster colleges). - FCA supports group-wide supervisor through MoUs, sharing legal entity, business model, governance, and risk information; signs Coordination Arrangements and co-operation agreements among Crisis Management Group Members. ### ComFrame requirements and crisis arrangements - PRA guidance requires an International College for IAIGs on an annual basis; college agreements detail content and frequency of information exchanges and include ICS data dissemination and consideration. - College coordination agreements include cooperation provisions for crises and organization of specialized emergency teams. - At the time of the FSAP mission, PRA had not yet established Crisis Management Groups for all U.K. IAIGs (process expected to be completed during 2022). ### Supervisory cooperation assessment and recommendations - Assessment: Largely Observed - Comments and suggested actions: - Roles of the PRA as group supervisor are detailed and cooperation with foreign supervisors functions effectively; the same applies to PRA and FCA as involved supervisors. - PRA should finalize establishment of Crisis Management Groups for all IAIGs and ensure appropriate membership, including resolution authorities where necessary. - Setting up a platform for supervisory cooperation for Lloyd’s (and potentially the London market more broadly) could improve interactions and information exchange with supervisors abroad, regardless of Lloyd’s regulated entity status or physical presence. *Source: 1gbrea2022010 - Part 9 of the MLRs provides the FCA with enforcement powers and sets out that failure* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1gbrea2022010.pdf_