Featured Product

    Charlotte Gerken of PRA Outlines Risk Management Work in Insurance

    September 24, 2019

    While speaking at the 24th Annual Financial CEO conference in London, Charlotte Gerken of PRA outlined the ongoing and upcoming policy work on insurance risk management. This includes a consultation paper on the prudent person principle and a supervisory statement on liquidity risk management. She also explained that PRA is thinking about capital treatment and reporting aspects in terms of addressing the cyber risk and is planning to issue a supervisory statement in the area of outsourcing and third-party risk management.

    Ms. Gerken outlined the recent guidance issued and the work being in the area of liquidity management, highlighting that much of the response to complex or unmodelable risks is not quantitative but qualitative, which is the domain of the prudent person principle. In the context of Solvency II the prudent person principle sets high level, qualitative standards. Therefore, in response to increasing supervisory concerns, PRA published a consultation paper which sets out proposals for a supervisory statement that clarifies how PRA expects firms to implement the prudent person principle. PRA also published a supervisory statement on liquidity risk management for insurers and updated the existing supervisory statement on illiquid unrated assets to take into account increasing levels of investment in income-producing real estate. All three pieces of guidance concern fundamental risk management principles and how PRA expects firms to put them into practice. 

    She then discussed technology as the new source of risk and opportunity, highlighting the growing demand for cyber insurance. Solvency II does not mention cyber risk at all, so there is a space for firms—and regulators—to fill. However, the basic framework for dealing with these kinds of business risks is already well-established. PRA is looking at incorporating this relatively new risk into its existing approach. This means thinking about capital treatment and reporting and working with industry to facilitate a move to more explicit coverage, standardization of contracts, and remove barriers to data sharing. 

    According to Ms. Gerken, the bigger unknowns for PRA are arising from the changes in business models; for instance, the increasing risk of cloud outsourcing. Insurers are increasingly using third-party data storage and processing, development infrastructure, and software delivery. PRA has surveyed insurers in this area and is analyzing the results. PRA is also planning to issue a new supervisory statement on outsourcing in the near future. The supervisory statement is intended to provide a one-stop source of reference on outsourcing and third-party risk management, bringing together the previously issued guidance. PRA is also finalizing policy proposals to require firms to improve their operational resilience, including making it clear how PRA expects them to identify important business services on which they rely.

    Some technology developments are creating less tractable risks, for example, machine learning. Hedging models are being built using neural networks rather than financial mathematics. These models are black boxes, producing results that are fundamentally unexplainable. Traditional models to which risk management principles are applied are built on known logic and it is possible to determine the key variables affecting results and sensitivity of the results to changes in those variables. Machine learning poses challenges for a traditional risk management framework based on identifying and analyzing key risks and dependencies. This gives rise to questions regarding how can a firm’s Board satisfy itself of the model’s prudence and appropriateness. Regulators are also struggling to understand what a governance and disclosure framework looks like for a model that cannot be explained. 

     

    Related Link: Speech

    Keywords: Europe, UK, Insurance, Liquidity Risk, Solvency II, Cyber Risk, Cloud Outsourcing, Fintech, Regtech, PRA

    Featured Experts
    Related Articles
    News

    APRA Issues Interim Update to Policy Priorities for 2021 and Beyond

    In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.

    September 24, 2021 WebPage Regulatory News
    News

    EC Adopts Solvency II and Resolution Rules Package for Insurers

    The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.

    September 22, 2021 WebPage Regulatory News
    News

    OCC Issues Booklets on Regulatory Reporting and Earnings

    The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.

    September 22, 2021 WebPage Regulatory News
    News

    ECB Sets Out Results of Economy-Wide Climate Stress Tests

    The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.

    September 22, 2021 WebPage Regulatory News
    News

    EBA Examines Implications of Increasing Use of Digital Platforms in EU

    The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.

    September 21, 2021 WebPage Regulatory News
    News

    HKMA Issues Updates on Policy Measures Intended to Ease COVID Impact

    The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.

    September 21, 2021 WebPage Regulatory News
    News

    ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures

    The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.

    September 21, 2021 WebPage Regulatory News
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.

    September 20, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7494