- Consultation papers will turn previous guidance into supervisory statements
- Increased onus on boards to ensure appropriate asset valuation processes
- Impact of guarantees on capital quality re-examined
The Prudential Regulation Authority (PRA) today issued two draft supervisory statements specifically aimed at the insurance sector:
- CP10/14 Valuation risk for insurers which covers matters relating to the valuation of assets; and
- CP9/14 Subordinated guarantees and the quality of capital for insurers which considers the impact of guarantees issued by an insurer in connection with capital instruments issued by another company.
Both papers follow earlier data requests sent to some firms, and previous guidance relating to valuation uncertainty and reciprocal financing, but now set expectations for all insurance firms.
Janine Hawes, insurance director at KPMG, commented “Although the original data requests were some months ago, these consultation papers have quickly followed Mark Carney’s speech referring to insurance board accountability. It is unclear whether this was intentional or not, but either way, boards will need to consider the implications of these short papers carefully.
“The valuation risk paper builds on the concerns raised last November and gives the clearest signal yet that the PRA expects senior management in insurers to be able to articulate and quantify the risks attached to their investment strategies. This is especially pertinent as they move away from traditional portfolios into less liquid asset classes such as property, securitised credit and infrastructure investments. Insurance boards will need to ensure that their governance procedures provide clear oversight of the source of valuation prices and lead to robust and prudent asset valuations
“The subordinated guarantees paper follows previous concerns around the treatment of so-called reciprocal financing and a data-gathering exercise on the extent to which insurers have provided guarantees that could potentially reduce the quality of their capital. This is not a new concept as all firms, not just insurers, are required to review the quality of their capital taking account of connected items. However, it appears that the PRA is concerned about the extent of issuance of guarantees by insurers to support capital issuances of other group companies, and whether this has been appropriately reflected in their solvency positions.
“Where the proceeds of the market issue has been passed down to the insurer, with the insurer guaranteeing performance of the market instrument, then insurers should reflect that guarantee in the classification of the capital it has issued. This has been correctly applied by many affected insurers, but the PRA now wants to understand the treatment applied across the entire market. This could result in some firms having to reclassify their capital. Insurers will have to supply details of any such arrangements, or confirmation that there are none, within one month. Further details will need to be provided by the end of the year.
“For most firms, this will not affect their reported solvency positions, but some may need to make changes to their arrangements.”
Notes to editor
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