The FSA and the Bank of England has published a joint paper on the proposed insurance regulator, the Prudential Regulation Authority and its approach on insurance regulation.
The PRA will have the specific mandate to monitor the insurance industry with the distinct responsibility to supervise the insurers, a clear recognition of the fact by the FSA and BoE that the insurance industry poses different risk to the economy.
The PRA will be responsible for monitoring of more than 2,000 firms, half of which will be insurance companies, with the rest certain type of investment companies and deposit-takers.
The PRA has been mandated to supervise life, general and wholesale insurance (including reinsurers), and firms engaged in similar activities.
The PRA is expected to regulate 636 general insurers, around 300 of which are from other EEA countries operating in Britain, 123 life insurance companies (about 70 from EEA countries), 133 friendly societies, and around 132 insurers operating in the London market.
“The PRA will be a focused prudential regulator for insurers. In setting out the PRA’s approach to insurance supervision, we have looked closely at the lessons arising from previous episodes of insurance company distress”, said Hector Sants, chief executive designate of PRA and the current chief executive of FSA.
“Reflecting the uncertain nature of insurers’ liabilities, prudential insurance regulation will be forward-looking and judgment-based, he added.
The PRA will follow the new European standard for insurance supervision, said Mr. Sants. “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”, he said.
“We recognise that the nature of insurers’ business models exposes them to a different set of risks than banks. The PRA’s regulation of insurers will seek to promote the safety and soundness of insurers to deliver two aims: to secure appropriate protection of policyholders and to contribute to the stability of the system”, said Julian Adams, director of insurance at FSA.
“The PRA will concentrate its resources and actions on those insurance firms and issues that pose the greatest risk to its objectives. The risk assessment framework for insurers will explicitly take into account the need to protect policyholders, the various risks to which insurers are exposed and the different way in which insurers can fail”, he added.
“Insurance companies can in some circumstances pose risk to the stability of the financial system – via a range of channels, including as providers of funds to banks”, said Andrew Bailey, director of banks and building societies at FSA and deputy chief executive designate at the PRA.
“The insurance supervisors will work closely with the Financial Policy Committee, who will assess system-wide risks”, Mr. Bailey added.