The UK’s Prudential Regulation Authority (PRA) will step up its oversight of the insurance industry, which must conform to Europe’s Solvency II regulatory regime from January 1.

Under the regime, regulators will put more emphasis on insurers’ risk profiles and the quality of their risk management and governance systems, rather than compliance monitoring.

“Solvency II will provide the PRA with much richer and more timely data to carry out this sort of analysis,” Bank of England Director of General Insurance Chris Moulder said.

“With Solvency II under our belts, I expect to see additional attention given to some of the broader risks we see in the market.”

He says competitive pressures amid low interest rates may tempt some insurers to rely on top-line growth, increase reserve releases or buy certain forms of reinsurance to meet profit targets. Such situations call for strong boards and internal control systems to protect insurers’ capital positions.

“As regulator, the PRA has responsibility to ensure firms continue to have an adequate level of resilience to meet current and future policyholder obligations,” Mr Mulder said.

“We expect boards to challenge where a firm’s strategy either threatens this objective, or where the strategy compromises the ability for adequate oversight.”

The PRA will shift its focus to underwriting and pricing governance.

It wants to know if boards are receiving adequate information to properly assess whether management is taking on too much risk.

“Underwriting, and specifically underwriting controls, are the first line of defence in identifying the extent, and the potential impact, of continuing soft market conditions,” Mr Mulder said.

“We will begin to prioritise work on underwriting and pricing governance.”

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