Featured Product

    PRA Letter Shares Insights from Supervisory Review of Solvency II Data

    November 13, 2020

    PRA issued a letter to chief risk officers of general insurance firms, setting out insights from its supervisory review work. The letter focuses on reserving and exposure management, including some observations on uncertainty in light of the COVID-19 crisis. PRA believes that the insights will be useful as firms prepare for the year-end reserving exercise and plan for the 2021 underwriting year. PRA expects the board and reserving committee to reflect the observations presented in this letter appropriately and explicitly as part of setting the year-end Solvency II and booked reserves.

    In the letter, PRA highlights that two of the areas of concern—bias in reserve estimates and possible weakening in case reserve estimates—persist in the analysis of the latest Solvency II reporting as at year-end 2019. The analysis indicates that reserving assumptions may have weakened over time, while data show that the claims experience continues to deteriorate. The board is encouraged to satisfy itself that the key assumptions related to the rate of future claims development remain appropriate, that the case reserving has not weakened over time, and that there is no unjustified anchoring to optimistic business plan loss ratios. In addition, PRA notes that COVID-19 has given rise to additional complexity and uncertainty in estimating ultimate losses, which has been grouped into four key areas:

    • Data—A number of firms have not been able to accurately identify and track COVID-19 exposed policies. Firms should ensure that this uncertainty is reflected in the reserve estimates and that, where possible, appropriate procedures are put in place to identify and track exposed policies.
    • Discontinuities in historical trends—A number of firms’ estimates for COVID-19 losses on casualty classes may be optimistic. Consequently, PRA encourages firms to make sufficient allowance for the uncertainty related to both the direct impact of COVID losses as well as the indirect impacts on claims arising from the downturn in the wider economy.
    • Appropriateness of common reserving methodologies—Given that the historical claims experience may not be a good guide for estimating future COVID-19 losses, alternative approaches such as the use of benchmarking and exposure-based analyses will be particularly useful to consider alongside more common reserving methodologies.
    • Reinsurance adequacy—Where there is a material reliance on reinsurance to protect against losses, be it intragroup or third party, PRA encourages the board to satisfy itself that those arrangements are adequate. It would be prudent to stress-test the assumptions related to reinsurance recoveries to understand the impact of reinsurance not responding as expected, and then to ensure sufficient allowance is made for this uncertainty when setting reserves.

    With respect to the exposure management frameworks across market, PRA has observed that the frameworks for non-property classes of business are less mature than for property classes. Another observation is that the state of man-made catastrophe risk assessment remains significantly behind that of the natural catastrophe risk assessment. Firms can expect PRA to increase its focus on firms that are materially exposed to man-made catastrophe risk and where progress toward better practice remains slow. In the letter, PRA is also encouraging firms to actively consider whether current risk and capital management frameworks—including current stress and scenario testing—sufficiently address the risks posed by contract uncertainty and unintended exposures. It may be useful to consider the identification, definition, and monitoring of all risk related to contract wording, including any key assumptions related to expected coverage. This includes the risk related to reinsurance contract wordings where coverage may not fully align with all assumed perils or events detailed in the underlying insurance contracts. 

     

    Related Link: Letter

     

    Keywords: Europe, UK, Insurance, Reinsurance, COVID-19, Reserving, Exposure Management, Solvency II, Reporting, Benchmarking, Stress Testing, PRA

    Featured Experts
    Related Articles
    News

    EBA Updates Filing Rules for Supervisory Reporting

    The European Banking Authority (EBA) published version 5.1 of the filing rules for supervisory reporting.

    October 19, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Procedures for Collection of AnaCredit Data

    The European Central Bank (ECB) Guideline 2021/1829 on the procedures for the collection of granular credit and credit risk data has been published in the Official Journal of European Union.

    October 19, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Procedures for Collection of AnaCredit Data

    The European Central Bank (ECB) Guideline 2021/1829 on the procedures for the collection of granular credit and credit risk data has been published in the Official Journal of European Union.

    October 19, 2021 WebPage Regulatory News
    News

    EBA Publishes Standards on Disclosure of Investment Policy Under IFR

    The European Banking Authority (EBA) published the final draft regulatory technical standards on disclosure of investment policy by investment firms, under the Investment Firms Regulation (IFR).

    October 19, 2021 WebPage Regulatory News
    News

    APRA Finalizes Guidance for New Prudential Standard on Remuneration

    The Australian Prudential Regulation Authority (APRA) published the prudential practice guide CPG 511 to assist banks, insurers, and superannuation licensees in meeting requirements of CPS 511, the new prudential standard on remuneration.

    October 18, 2021 WebPage Regulatory News
    News

    OCC Updated LIBOR Self-Assessment Tool for Banks

    The Office of the Comptroller of the Currency (OCC) published a bulletin that provides an updated self-assessment tool for banks to evaluate their preparedness for cessation of the London Interbank Offered Rate (LIBOR).

    October 18, 2021 WebPage Regulatory News
    News

    TCFD Updates Guidance for Financial Disclosures on Climate Risk

    The Financial Stability Board (FSB) published a report that examines the progress made toward disclosures aligned with recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

    October 14, 2021 WebPage Regulatory News
    News

    BCBS Report Examines Progress on Adoption of Basel III Framework

    The Basel Committee on Banking Supervision (BCBS) published the progress report on adoption of the Basel III regulatory framework in member jurisdictions.

    October 14, 2021 WebPage Regulatory News
    News

    ACPR Implements Updates Related to DPM Version 3.1

    The French Prudential Supervisory Authority (ACPR) has implemented, in its information system, updates linked to the Data Point Model (DPM) version 3.1.

    October 14, 2021 WebPage Regulatory News
    News

    EBA Note Examines Transition Risks of Benchmark Rates

    The European Banking Authority (EBA) published a thematic note that aims to identify and raise awareness of the transition risks of benchmark rates, as the London Interbank Offered Rate (LIBOR) and the Euro Overnight Index Average (EONIA) are close to being phased out.

    October 14, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7571