Regulation of the insurance sector "about to change", PRA announces

Rozi Jones
16th March 2021
Sam Woods Bank of England
"We have no interest whatsoever in lowering levels of resilience or policyholder protection, but we can and should make changes to tailor regulation so it fits our market better "

Sam Woods, CEO of the Prudential Regulation Authority (PRA), has announced that "regulation of the insurance sector in the UK is about to change".

During an online speech given to the ABI, Woods said that more of the rules insurers need to follow will be set out in the PRA’s rule book rather than in law.

He said that the PRA favours a shift towards more rule-making by the regulator in the "new world of post-Brexit Britain".

Woods continued: "Now you may be thinking: “quelle surprise, the regulator wants to have more control over the rules!” In fact, I can tell you that the PRA has no pro-active desire to increase its responsibilities. We have enough on our plate already. It’s just that it seems clear that, for our market, putting the details in the regulator’s rules rather than in statute (as the EU typically does) is a better approach."

He clarified that this is the norm in all major jurisdictions apart from the EU and Switzerland and follows the same logic as the arrangements for setting monetary policy.

Woods added that the approach would also help to remove "unnecessary barriers to innovation and to give policyholders reasonable protection from any new risks that arrive with it".

He explained: "Now that we have left the EU we have no interest whatsoever in lowering levels of resilience or policyholder protection, but we can and should make changes to tailor regulation so it fits our market better and is more efficient and coherent. That process will take some time but it will work better if the detailed rules are placed into our rulebook."

Woods went on to discuss the regulator's new approach, asking: "Might we pursue the stability of the graveyard by imposing ever more stringent rules? Or might we go the other way, becoming captured by industry and not protecting policyholders enough? Put bluntly, can we be trusted with more power?"

He answered: "To address the point about the graveyard head on: I do not for one moment accept the caricature of a rampant regulator intent on crushing the industry under a slow-motion avalanche of new capital requirements, heedless of the wider consequences.

"Moreover, the PRA does not aspire to a zero failure regime – more than fifty insurers regulated by the PRA are currently in some form of run off, for example – and even our primary objective of safety and soundness is in some ways just a means to end. Policyholders are not well served by firms that are so safe and cautious that they might apparently be able to live forever, but never grow or change. Such firms are more likely to be broken by a storm than to bend with it.

"What we do have a very low appetite for is disorderly failure. I think our track record is good here so far, but there is more to be done. The UK does not yet have a resolution authority for insurers, as recommended in the FSB’s key attributes. Assessing firms’ preparedness for exiting the market in an orderly manner, and working with boards to make improvements where needed, will be an increasing focus of our supervision in the next few years."

However, Woods agreed that if the PRA were given more rule-making powers, he recognises the need for "enhanced accountability", stating that "Parliament might choose to expand the amount of time it spends examining our regulations".

He continued: "As a regular attendee of TSC hearings I can assure you that we are already held very robustly to account for our activities – but I can see the point that some in Parliament have been making that if we do more rule-making, and with European Parliamentary scrutiny of rule-making no longer present, then we might be expected to do more to support Parliament in probing technical regulatory issues."

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