Insurance - Q1 2023

1. The FCA issued a Dear CEO letter to help firms implement and embed the Consumer Duty effectively. They set out three and five areas of focus for General and Life insurance sectors respectively.
2. The PRA published the results and thematic observations of their Insurance Stress Test launched in May 2022 (IST 2022). 54 insurers participated including 16 life, 17 general insurers and 21 Lloyd’s syndicates.
3. Sam Woods, the PRA Chief, spoke about the next steps for reforming Solvency II in the UK (Solvency UK).
4. HM Treasury published its consultation paper setting out proposals for the introduction of an Insurance Resolution Regime (IRR).

Consumer Duty FCA Dear CEO letter - General Insurance (GI) and Pure Protection sectors

Firms need to ensure that:

Product governance

Customers are not at risk of purchasing poor-value products and/or services that do not meet their needs.

• Products and services are regularly reviewed for fair value, considering a diverse range of factors, and this can be evidenced.
• Where problems are identified, they are rectified quickly.
• Firms are up-to-date on the FCA GI value measures data.

Communication with consumers

• Customers get timely, and tailored information in a format that allows them to make informed decisions about whether a product meets their needs.
• Communications are tested, monitored and adapted to support understanding and good outcomes for customers.

Claims processes and outcomes

• Customers are at the centre of the claims process and receive timely and appropriate communications throughout the claims journey.
• Quality assurance reviews of the claims process consider the full customer experience and not just the financial outcome of the claims.
• Monitoring ensures the quick identification of any customers or groups of customers experiencing poor outcomes.

Consumer Duty FCA Dear CEO letter - Life insurance

Firms need to ensure that –

Outsourcing and reliance on outsourced service providers (OSPs)

• They engage early and proactively with their material OSPs for compliance with the Duty by the deadline. OSPs need to define requirements and agree on timelines for delivery of the changes required.

Existing products

• Issues, where identified, are addressed before the product is sold to new customers. Firms also need to address any harm to customers with existing contracts.

Volume and complexity of closed products

• They start to take action for their closed products. The FCA has set out a non-exhaustive list of actions, including getting a clear view of the product portfolio and closed product reviews.

Supporting pensions and retirement consumer decision-making

• They are ready for FCA requests about progress, findings and actions from activities such as customer journey mapping and communication reviews. The FCA has announced a holistic review of the boundary between advice and guidance to support consumer engagement.

Life manufacturers and distribution

• Manufacturers and distributors work together and share information to perform their roles effectively and deliver good outcomes.

The FCA Handbook Notice No.108

Product Governance for Overseas Insurance Products

The FCA made changes to disapply certain PROD 4 rules for overseas distribution of GI and pure protection products. The relevant instrument for the change came into force on 31 March 2023.

Products for overseas distribution

The FCA removed products distributed exclusively to customers outside the UK from the scope of the PROD 4 rules.

Products for both UK and overseas distribution

For products distributed both within the UK and overseas, the rules will continue to apply but without the requirement for firms to consider the impact of distribution to overseas customers on product value.

The PRA Insurance Stress Test 2022 feedback

The PRA published the results and thematic observations of their Insurance Stress Test launched in May 2022 (IST 2022). 54 insurers participated including 16 life, 17 general insurers and 21 Lloyd’s syndicates. Scenarios included increase in longevity (for LIs) and insured natural catastrophes (for GIs).

The results indicated that the UK insurance sector is resilient to the PRA-specified scenarios.

In total, based on the participants, the life insurance sector’s solvency capital requirement (SCR) coverage fell from 162% to 123% due to credit downgrades, property shocks, and longevity improvements.

The general insurance sector’s SCR coverage remained above 120% in all scenarios with the primary mitigant was reinsurance.

The PRA Chief Executive Officer’s speech on Solvency II reforms

Sam Woods spoke about the next steps for reforming Solvency II in the UK (Solvency UK).

Competitiveness and growth

The speech summarised some of the planned changes for Solvency UK:

• Reporting requirements – The removal of reporting requirements not needed for the UK market.
• Internal model approvals – Plans to streamline the rules for internal model approvals by removing the majority of the internal model tests and standards. The PRA will instead rely on approved functions to interpret principles-based requirements.
• Assets eligible for the matching adjustment – Plans to widen the range of assets that are eligible, including assets with prepayment options and construction phases.
• Threshold to enter Solvency UK regime – Plans to increase the threshold for gross written premiums to £15m and technical provisions to £50m. It is also planning to introduce a mobilisation regime for insurers with lower barriers to entry for new firms.
• Insurance Special Purpose Vehicle (ISPV) regime – Plans to simplify and clarify expectations around the ISPV regime. This would make it easier for firms to participate in the market and allow new ways of raising capital.

Introducing a UK Insurance Resolution Regime

In January 2023, HM Treasury published its consultation paper setting out proposals for the introduction of an Insurance Resolution Regime (IRR) for the UK insurance sector. The regime would apply to any insurer identified as systemically significant in the event of failure.

When will resolution apply?

(Re)insurers must meet four resolution conditions before being placed into resolution. These are set by the PRA and dependent on assessments performed by them.

Powers possessed by the PRA and BoE

Resolution plans are currently assessed through the PRA’s existing future exit planning framework; however, the regime introduces new powers including the authority to remove or replace directors and senior managers of an insurer and prohibit payments of dividends to shareholders, amongst others.

What happens when resolution conditions are satisfied?

BoE can exercise four stabilisation options: transfer to a private sector purchaser; establish a bridge institution; bail-in; and/or temporary public ownership.

The PRA will continue to manage the (re)insurers recovery plan and exit plans, this has been cited as a top priority for the PRA in 2023.

A more detailed article on the IRR can be found here.

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