The UK insurance industry has been given an insight into its future regulation with the release of a paper on how new regulatory body, the Prudential Regulation Authority (PRA), will approach supervision of the industry.

The paper, released jointly by the Bank of England and the Financial Services Authority (FSA), recognises that the risks posed by insurers are different from the other firms it will supervise.

The FSA’s Director of Insurance, Julian Adams, says the new regulator will recognise “that the nature of insurers’ business models exposes them to a different set of risks than banks” and that regulations will aim to “secure appropriate protection of policyholders and to contribute to the stability of the system”.

Hector Sants, FSA CEO and PRA CEO-designate, says the PRA’s approach to insurance supervision comes after looking closely at the lessons “from previous episodes of insurance company distress”.

“Reflecting the uncertain nature of insurers’ liabilities, prudential insurance regulation will be forward-looking and judgement-based,” he said. “Much of the PRA’s proposed approach will be achieved in practice through the application of Solvency II, the new European framework for insurance supervision.”

Of the 2000 firms the PRA will regulate from the end of 2012, around half will be insurers.

Current numbers indicate it will regulate 636 general insurers, around 300 of which operate in the UK under a passport from other European Economic Area (EEA) countries, 123 life insurers (of which 70 will be EEA-authorised), 133 friendly societies and around 132 London Market insurers.