Prudential regulation

Firms’ preparations for transition from LIBOR to risk-free rates

On 17 September a letter from the PRA and FCA to the CEOs of major banks and insurers was published. The letters were sent to the largest banks and insurers in the first instance and requested the recipients for “a board approved summary” of the firms’ assessment of the key risks relating to LIBOR discontinuation and details of actions planned to take to mitigate the risks they are taking to manage transition from LIBOR to alternative interest rate benchmarks. The aim of the letter is to seek assurance that firms' Boards and senior managers understand the risks associated with the transition and are taking appropriate action now so that firms can transition to alternative rates before the end of 2021. 

The letter notes that Solvency II requires insurers to discount liabilities using risk-free rate curves that are in many currencies currently derived from LIBOR. Monitoring of LIBOR transition has been added as a topic to EIOPA’s general work on insurance risk free rates. Firms should understand the risks from LIBOR transition and any dependencies on Solvency II requirements, including in relation to EIOPA’s work.

The regulators are encouraging all firms that currently rely on LIBOR to read and reflect on this letter. Recipients of the letter need to respond to the regulators by 14 December 2018

Strengthening accountability: implementing the extension of the SM&CR to insurers - CP20/18 

On 17 September, the PRA issued a Consultation Paper (CP20/18) outlining proposals for some technical consequential changes and minor administrative amendments to the rules in the PRA Rulebook, concerning the extension of the Senior Managers and Certification Regime (SMCR) to insurers. The extended SMCR for insurers will become effective on 10 December 2018, and the proposed rule changes will also apply from the same date, except for one minor change. 

Comments to this consultation should be submitted on or before 17 October 2018.

On 25 September 2018 the Bank of England published its Quarterly Bulletin, which contains an article focussing on strengthening the link between seniority and accountability under the SMCR. The article gives a good overview of the new regime.

The Actuarial Function, underwriting, capital and reserving – joining the dots

On 17 September 2018 the PRA published a letter to Chief Actuaries which notes that discussions with firms and reviews of Actuarial Function Reports have in some cases identified insufficient challenge, or a lack of appropriate independence and objectivity in the views being expressed. The potential consequences of an ineffective actuarial function include risks from inadequate reserving (and capital assessments), leading to insufficient premiums, increased anti-selection and/or poor underwriting performance. The letter highlights

  • the insights from the inaugural Chief Actuary Forum for general insurers held on 2 July 2018;
  • the PRA’s continuing focus on realism in firms’ business planning and underwriting policies; 
  • the detailed findings from the targeted reviews of firms’ reserving.
The letter supplements the PRA’s first letter to Chief Actuaries in February 2018 and the letter to Chief Executives of specialist general insurance firms of May 2018.

charles.portsmouth@moorestephens.com