PRA Dear CEO letter: 2024 Priorities for Insurance Supervision

On 11th January, the PRA published a “Dear CEO” letter covering their priority areas for Insurance Supervision activity over the coming year.  As in previous years, the letter contained much material for firms to digest and plan for, covering a wide range of important areas.

We have summarised below nine key areas, following the headings in PRA’s letter, which general insurance firms will need to note and potential feed into their activity during 2024:

Financial markets and economic environment:

• Credit risk & Liquidity risk resilience:  the PRA noted, given the economic backdrop and recent liquidity strain events, the importance for firms to have appropriate credit and liquidity risk management frameworks.  The PRA are planning to continue their system-wide exploratory scenario (SWES) exercise during 2024 to further improve their understanding of firms’ exposures to these risks.

Business and operating environment:

• Operation resilience:  the PRA noted that firms have just over a year to complete their implementation of the PRA’s operational resilience expectations.
• Ease of exit:  the PRA signalled an upcoming consultation on firms’ plans for orderly solvent exits.
• Regulatory reform:  final policy statements will be published during 2024 to ensure that Solvency UK can be completed by the end of the year.  The PRA will provide more clarity on areas including internal model review processes.

General Insurance specific areas:

• Cyber underwriting risk: the PRA plan a focus on capital and exposure management capabilities of firms relating to cyber insurance, noting the recent growth of this sector along with a continued evolution of cyber threats, and the technological and geopolitical landscape.
• Claims inflation:  this continues to be a focus area for the PRA.  They expect to see a lag in the emergence of claims inflation in firms’ data, and plan to continue to monitor this through regulatory returns.
• Model drift:  the PRA plan a targeted use of supervisory tools and actions where they have observed model drift in firms’ internal models.  The PRA flagged issues including limited allowance for inflation uncertainty, potential optimism in expected underwriting profits, potential optimism in cost and benefit of reinsurance, and limited allowance for geopolitical and economic uncertainties.
• General insurance stress test: the first dynamic stress test to be conducted by the PRA will take place during 2025.  Preparatory engagement with the market will start during the first half of 2024.

Climate Change:

• Financial risk arising from climate change: the PRA noted that they plan to continue their assessment of the steps that firms are taking to manage climate-related financial risks.  They plan an update to their previously published Supervisory Statement SS3/19.

If you would like to discuss any of these matters, and how Marcuson Consulting can help you, please get in touch at enquiries@marcuson.co.