Tuesday, 22 August 2017

PRA proposes big change to general insurance fees

Regulator’s planned changes could have a ‘substantial’ effect on general insurance fees in some cases

The PRA is proposing to change the way it calculates the fees general insurers pay to it, which it acknowledges could have a “substantial” effect in some cases.

The PRA is planning to implement its proposed changes on 1 March 2018.  Insurers have until 24 October to respond to the proposals, which were published in a consultation paper this morning.

The PRA’s periodic general insurance fees are currently calculated based on an insurer’s gross premium income and gross technical liabilities, weighted 90% towards gross premium income and 10% towards gross technical liabilities.

The PRA has proposed changing the measures to gross written premium and best estimate liabilities.

In a bigger change, it is also proposing changing the weighting to 75% towards gross written premium and 25% to best estimate liabilities, the effect of which could be “substantial” in some cases.

The PRA said it is proposing the weighting change because the current weighting, introduced by its predecessor regulator the Financial Services Authority, “is no longer appropriate given the PRA’s objectives and how it prioritises its work.”

It added: “In particular, a 10% weighting for liabilities means firms with longer-term liabilities and larger balance sheets may pay too low a fee for the risks they pose to the PRA’s statutory objectives, relative to firms with higher premium income but shorter-term liabilities.”

Three options

The PRA has considered three main options for the weightings: leaving them unchanged, giving the two measures equal weighting and weighting them 75%/25%.

But it added that moving to an equal weighting for the two measures could result in some firms facing much higher fees, which it said would be too large a change at this stage, and so it has settled on proposing the 75%/25% weighting.

The regulator said: “This is closer to the balance used in certain internal PRA risk metrics than the current approach. However, the PRA recognises that this change would also be substantial in some cases, and that arguments are finely balanced. The PRA would welcome views from firms on the alternatives.”

On the shift to gross written premium and best estimate liabilities, the PRA said that gross written premium was a very similar measure to gross premium income and should result in little change.

It added that while the best estimate liabilities measure takes into account discounted cash flows, and so is different from the old gross technical liabilities measure, it is a broadly similar concept which should result in similar fees.

It estimates that general insurers would have paid periodic fees of £510 per £1m of gross written premium and £30 per £1m of best estimate liabilities on the current 90/10 weighting for the 2017/18 year if the proposals had been in place.

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