Context
The PRA has published a consultation paper, which sets out the Prudential Regulation Authority’s proposals to consolidate and formalise existing PRA policy on overseas insurers that write business in the UK through the establishment of a third-country branch, and to offer more clarity on the expectations of these third-country branches.
Key points to note
The PRA’s proposals have been informed by three key drivers of change:
- The UK’s withdrawal from the EU.
- The PRA’s lessons learned in the authorisation and supervision of third-country insurance branches during the Temporary Permissions Regime (TPR).
- The Solvency II Review, which contains proposals relating to third-country branches.
The PRA is proposing to delete SS2/18 – International insurers: the Prudential Regulation Authority’s approach to branch authorisation and supervision and transfer most of the provisions into a proposed new Statement of Policy (SoP), which consolidates and clarifies its approach to authorisation and supervision of third-country branches. While the PRA’s substantive approach to the authorisation and supervision of branches would remain materially unchanged, the proposed new SoP will provide further detail on its approach to assessing the risks of a third-country branch.
The proposals in the draft SoP also consider the implications for the PRA’s assessment of aggregate reinsurance cessions where third-country branch liabilities include FSCS-protected liabilities, which are relevant for both prospective and existing third-country branches regarding the expectations relating to reinsurance arrangements. Reinsurance can be an important risk management tool. However, overreliance on reinsurance can undermine the substance in a legal entity and impact upon the incentives for prudent risk selection and management. As such, the PRA focuses on levels of intra-group reinsurance, aggregate reinsurance cessions and concentration of reinsurance arrangements as these are areas that could pose risks to third-country branch undertakings’ independence and supervisibility.
The PRA’s discussions with third-country branches during the Temporary Permissions Regime (TPR) highlighted a number of topics where further clarification of the PRA’s expectations would be beneficial to third-country insurance branches. Therefore, the PRA proposes to update SS44/15 – Solvency II: third-country insurance and pure reinsurance branches, to make amendments to existing text, and to include additional chapters setting out the PRA’s expectations in relation to specific topics:
- Notifications
- Own Risk and Solvency Assessment (ORSA) reporting
- Systems of governance and Senior Management Functions (SMFs)
- Re-domiciliation
- Outsourcing and operational risk
- Reinsurance counterparty risk
Feedback, comments or enquiries related to this Consultation, which closes on 12th January 2024, can be made to the PRA at CP21_23@bankofengland.co.uk.
Next actions
None – for information and awareness.