The key areas of focus in 2023 will be:

Financial resilience

The combination of the on-going recession and high inflation provide a very challenging economic outlook for insurers.  For life insurers, the PRA has identified the potential threat of firms having increased exposure to credit and concentration risk and therefore expects life insurers to stress test their capital planning against prolonged adverse credit scenarios.  For general insurers, the PRA expects the pressures of claims inflation and the uncertainty around future claims settlement costs to continue.  Consequently, the PRA expects general insurers to factor general and social inflation drivers into their underlying pricing, reserving, business planning and capital modelling.

Risk management

The PRA expects firms to be proactive in assessing the adequacy of their risk management and control frameworks to ensure that they can respond to new and unanticipated changes in market and credit risk conditions.  In particular, the PRA spotlights the recent Liability-Driven Investment shock as having highlighted weaknesses in insurers’ liquidity risk frameworks and expects insurers to test the resilience of liquidity sources to market dysfunction and re-evaluate potential liquidity demands created by use of derivatives in risk management. 

The PRA expects firms to check that their models remain valid and robust in the face of multiple concurrent stresses, in particular, the PRA will focus on the strength and ability of firms’ capital models to operate in substantially different economic conditions from those when the models were developed.  Firms will be expected to consider whether the model risk management principles for banks (set out in Consultation Paper 6/22) could be applied.

The PRA will carry out a thematic review into the bulk purchase annuity transactions market.

Implementing financial reforms

The PRA will continue to work with the UK Government to implement the proposed Solvency II reforms.  The PRA will engage with insurers on the technical details of reforms in advance of formal consultations.  The PRA expects to finish its assessment of outstanding applications for branch authorisations and will set out its proposed approach to branch supervision.

Reinsurance risk

The PRA will focus on risks arising from the continued high level of longevity reinsurance and funded reinsurance and expect firms to consider their compliance with the Prudent Person Principle for the risks associated with reinsurance activities. The PRA will be considering if policy action is needed in relation to reinsurance structures and limits.

Operational resilience

The PRA will continue to assess firms against the rules in Supervisory Statement 1/21 (Operational resilience: impact tolerances for important business services) and will work with firms to ensure that firms are operating within the impact tolerances they have set.  The PRA will be reviewing the appropriateness of impact tolerances, identification of dependencies, and robustness of testing plans.  In relation to third party providers, the PRA expects firms to be able to demonstrate that they are meeting the requirements set out in Supervisory Statement 2/21 – Outsourcing and third-party risk management.

Ease of exit for insurers

The PRA is focused on improving ease of exit for insurers and in 2023 will consult on requirements for insurers to prepare exit plans.

Other areas of focus

Non-natural catastrophe risk – The PRA will work with general insurers to improve practice and enhance risk management capabilities in relation to non-natural catastrophe.

Financial risks arising from climate change -  The PRA will continue to monitor firms to ensure that they are meeting the supervisory expectations set out in Supervisory Statement 3/19 (Enhancing banks’ and insurers’ approaches to managing financial risks from climate change) and are dealing with barriers to progress.

Diversity, equity and inclusion (DEI) – the PRA expects firms to continue to embed DEI in their cultures.  It will publish a consultation paper setting out proposals to introduce a new regulatory framework in DEI in the financial sector.

Supervisory approach – the PRA will update its published supervisory approach documents during the first half of 2023.  Further changes may also be made to reflect the new secondary competitiveness and growth objective for the PRA if passed into law in the financial Services and Markets Bill.