On 10 January 2023, the PRA published its annual letter to CEOs in the insurance industry, setting out its regulatory priorities for 2023.

This article summarises those regulatory priorities, considers how the PRA’s focus has evolved since 2022, and looks at what steps actuaries can take to help insurers meet those expectations.

How has the PRA’s focus evolved from 2022?

Overall, the nine focus areas from this year’s Dear CEO letter build on the six regulatory priorities from last year.

Five of the PRA’s 2022 priorities have been carried over from 2022. These are: financial resilience; implementing financial reforms; operational resilience; climate change; and DEI. Authorisation of third country branches was a priority last year, but has now been absorbed into other focus areas.

The additional four new focus areas are: risk management; reinsurance risk (mainly relevant for life insurers); ease of exit for insurers; and non-natural catastrophe risk.

In addition, the PRA notes that it is making changes to its supervisory approach, including to reduce the number of categories that firms can be classified as - from 5 to 4. There are also potential further changes coming, given the expectation for the UK Government to expand the PRA’s remit to include growth and competitiveness.

New focus areas for general insurers

Under the banner of risk management, the PRA is expecting firms to review their risk and control frameworks and ensure they remain able to provide appropriate early warning of key risks, despite the changing global environment. In addition, internal capital model validation is a key theme, with the PRA expecting firms to take steps to ensure models appropriately allow for the impact of inflation and global economic uncertainty – bearing in mind that these were built and parameterised in a very different global environment. Finally, the PRA encourages firms to take note of the CP6/22 consultation on model risk management in the banking sector.

The PRA’s focus on ease-of-exit further reinforces the concern about the risk of a global (or at least UK) recession and potentially challenging trading conditions for insurers in the near future. This priority is an acknowledgement that many insurers, especially smaller firms, lack robust recovery and resolution plans. The PRA expects firms without a plan to begin putting a plan in place if they have not done so already, and will consult on what an appropriate level of detail is for small firms.

The final new area of focus is on non-natural catastrophe modelling capabilities. This reflects the PRA’s concern that the sophistication of modelling techniques in this domain is lagging, despite the ongoing shift of London Market business towards casualty insurance.

What can actuaries do?

As always there are many ways that actuaries can support firms in addressing the PRA’s regulatory priorities. My suggestions for key focus areas are:

Inflation: 2023 presents new challenges for the modelling of inflation. Last year, it was clear that inflation rates captured within historical data were much lower than future inflation expectations in the economy. But now datasets contain at least some allowance for heightened inflation. In addition, there is some cautious optimism that inflation may have peaked and could fall quite rapidly over 2023. The continuing changes in the inflationary landscape means firms need to continue to prioritise inflationary model development and should avoid relying on unchanged assumptions from 2022.

Non-natural catastrophe risk: Enhanced actuarial modelling will play an important role in helping firms to monitor their exposures and set regulatory capital. A good starting point is to perform a gap analysis on existing data, then begin putting in place procedures to collect the data that will be needed to develop richer scenarios and modelling over time. Alongside this, actuaries should review with the wider business how well the scenarios reflect their exposures, and ensure that the metrics used in those scenarios align with latest market / economic data and management views.

Climate risk modelling: The insurance market has generally been slow in meeting the requirements of the PRA’s SS3/19 supervisory statement on climate change. In particular, performing quantitative scenario testing of the impact of climate change has proved challenging. Firms may need to partner with climate modelling specialists to assist with producing plausible long-term scenarios. Actuaries will need to develop the knowledge required to help review these models to ensure that they appropriately reflect their own firm’s risk exposures.

Next steps for insurers

Overall the PRA expects firms to be looking at a wide range of different areas of risk, ranging from technical risk modelling through to softer issues like DEI.

The most successful firms will be those who address regulatory issues in a value-adding way, rather than regarding them as stand-alone “tick-box” activities. With the increasing number of focus areas for the PRA, the beginning of 2023 represents a good opportunity for firms to consider their overall strategy for addressing regulatory concerns as part of their overall risk management programme.

First published in the January 2023 edition of the Actuarial Post