The PRA published policy statement PS16/17 and supervisory statement SS5/17 on dealing with a market turning event in the general insurance sector. PS16/17 provides feedback to responses for consultation paper CP32/16 titled “Dealing with a market turning event in the general insurance sector.” SS5/17 sets out PRA’s expectations of how firms might prepare for, and respond to, a major general insurance loss event, which might affect their solvency and future business plans, and explains how the PRA expects firms to interact with it on these issues.
The statements are relevant to all PRA-regulated general insurance firms in scope of the Solvency II Directive and to the Society of Lloyd’s and managing agents (Solvency II firms). SS5/17 is aimed at the firms operating in the global specialty insurance and reinsurance market, known as the London Market, whose business models are exposed to low-probability, high-severity catastrophe risks. The SS5/17 should be read in conjunction with PRA rules in the Solvency II sector of the PRA Rulebook and the PRA insurance approach document. The PRA had received seven responses to CP32/16 and amended the draft supervisory statement based on further analyses and the responses received. The changes and feedback to responses are set out in Chapter 2 of PS16/17. PS16/17 also provides responses, in the context of the proposals and policy on a market turning event, to recommendations made to the PRA, as set out in an industry whitepaper that was published in January 2017. This follows an industry-sponsored dry run exercise simulating a USD 200 billion catastrophic loss event that took place in November 2016. No changes have been made to the SS5/17 regarding a breach of minimum capital requirement (MCR) or solvency capital requirement (SCR) and the changes include:
Further consideration of the characteristics of a market turning event and its impact on firms’ model change policies
Addressing concerns over the speed of a regulatory response following a market turning event (including the PRA’s interaction with Lloyd’s and other regulators)
Amendments made to the example loss return template
Clarification of the application of proportionality and firms’ use of existing documentation such as Own Risk & Solvency Assessments (ORSAs)
Amendments to more explicitly draw out the importance of liquidity management following a market turning event
Keywords: Europe, United Kingdom, PRA, Insurance, Solvency II, Market Turning Event
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