By Kareline Daguer, Director, PwC
On a less certain note, Brexit is looming and this is the one big thing that will take both significant time and effort for firms and regulators to get to deal with. Brexit will also have a knock-on effect on firms’ business models and structures for years to come. But what else is on the radar that is worth noting?
First, operational and cyber resilience. Cyber attacks are an ever-increasing threat to financial institutions, but complex structures with significant reliance on outsourcing arrangements are proving challenging. In addition, as a result of Brexit, many firms will become even more complex, with structures emerging that do not necessarily mirror the way they naturally operate.
All of the above opens the door for risks to mount and go undetected, and for resilience to erode over time. Both the FCA and PRA will be assessing how well firms’ business activities and supporting services are designed to adapt to failures in any part of their infrastructure, to ensure firms can continue to deliver critical services through disruption.
There are currently no international standards for operational resilience, so the PRA and FCA are working on a framework to set out risk tolerance ranges for firms, with a focus on the outage of critical economic functions such as payments or access to deposits. Firms with greater market share would have a lower risk tolerance applied. Both the PRA and the FCA will be expanding on this new framework in the next few months and firms should expect to see micro-supervisory interventions where the regulator sets expectations and assesses the targeted firms. Large life insurers, annuity writers and general insurers should be able to demonstrate that, in the event of severe disruption, they would be able to continue to protect policyholders and discharge their insurance obligations.
Other planned areas of focus for the PRA include finalising changes to Solvency II improvements, which started six months ago. The most eagerly awaited of these is probably the review of the risk margin. Balance sheet risk continues to be at the top of the agenda for life insurers, where in the past years many firms have shifted towards investing in more illiquid and complex assets. The PRA plans to conduct reviews of assets, business model analysis and capital management. For general insurers the focus will be on a review of exposure management, including reinsurance arrangements and reserving adequacy for long-tail or casualty lines.
Although none of the above will come as a surprise to insurers, it is important to understand how the regulators’ planned activities are likely to impact supervision, and to ensure that senior management are aware of the potential impact on their firms.
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