Prudential regulation of insurance has been transferred to a new unit at the Bank of England – the Prudential Regulation Authority (PRA).
The PRA’s approach to regulation and supervision has three characteristics:
- A judgement-based approach: The PRA will use judgement in determining whether financial firms are safe and sound, whether insurers provide appropriate protection for policyholders and whether firms continue to meet the Threshold Conditions.
- A forward-looking approach: The PRA will assess firms not just against current risks, but also against those that could plausibly arise in the future. Where the PRA judges it necessary to intervene, it will generally aim to do so at an early stage.
- A focused approach: The PRA will focus on those issues and those firms that pose the greatest risk to the stability of the UK financial system and policyholders.
The PRA approach to supervision will not seek to operate a “zero-failure” regime. Rather, the PRA will seek to ensure that a financial firm which fails does so in a way that avoids significant disruption to the supply of critical financial services.
It seems inevitable that PRA will make enquiries about emerging liability risks; these have on occasion been a disruptive threat and would probably have failed the new Threshold Conditions. Special arrangements apply to Lloyd’s where firms tend to be too small to individually threaten the overall system but collectively, could do so. Shareholders here, it is asserted, will have the same protection as shareholders outside Lloyd’s.
For a brief guide to emerging liability risks see Emerging risks management
