Sam Woods denies ‘the caricature of a rampant regulator intent on crushing the industry under a slow motion avalanche of new capital requirements’, but acknowledges that ‘a changing world requires a tough but flexible regulatory regime’
UK insurers have been told that the regulatory changes that will arrive this year will not see any drop in standards, nor will it herald a rampant regulator.
Speaking to a meeting of senior industry figures at an event hosted by the Association of British Insurers (ABI), Sam Woods, deputy governor for prudential regulation and chief executive officer of the Prudential Regulation Authority, said change was needed, but it would not be at the expense of standards.
“As a prudential regulator, we oversee a large and vibrant insurance sector supplying vital financial services to the wider economy,” he said. “But safeguarding the stability of their supply is the whole point of our role.”
Fluctuating job description
Woods said the PRA’s role is about to change, with the solvency II review well under way as well as the proposed reforms to the architecture of financial regulation “as we enter the brave new world of post-Brexit Britain”.
“The PRA has no proactive desire to increase its responsibilities,” he added.
“We have enough on our plate already. It’s just that it seems clear that, for our market, putting the details in the regulator’s rules rather than in statute (as the EU typically does) is a better approach.
“I say better for our market, but in fact this is the norm in all major jurisdictions apart from the EU and Switzerland.”
Woods said on a purely practical level, the PRA ensures that rule making is closely informed by day-to-day risk assessments that it has to conduct as supervisors. This approach helps ensure that rule making keeps pace with developments and supports innovation.
“A changing world requires a tough but flexible regulatory regime that can adapt itself rapidly as needed – both to remove unnecessary barriers to innovation and to give policyholders reasonable protection from any new risks that arrive with it,” he said.
“The alternative is a more sluggish regime, more conservatively calibrated to compensate for its lack of manoeuvrability. A regime largely contained in the PRA’s rulebook is also easier to update when it seems that a rule is not working properly.
“I do not for one moment accept the caricature of a rampant regulator intent on crushing the industry under a slow motion avalanche of new capital requirements, heedless of the wider consequences.”
Low appetite for disorderly failure
However, Woods warned that the PRA does not aspire to a zero failure regime and that taking a safe business approach doesn’t always lead to financial security.
“More than 50 insurers regulated by the PRA are currently in some form of run off, for example, and even our primary objective of safety and soundness is in some ways just a means to end.
“Policyholders are not well served by firms that are so safe and cautious that they might apparently be able to live forever, but never grow or change. Such firms are more likely to be broken by a storm than to bend with it.
“On the contrary, policyholders are better protected by firms that: first, are sufficiently profitable and attractive to external capital to be able to change and grow in response to the changing external environment; and second, are able, if their business models do fail, to exit the market in an orderly fashion, paying their remaining liabilities as they fall due.
“What we do have a very low appetite for is disorderly failure. I think our track record is good here so far, but there is more to be done.
“The UK does not yet have a resolution authority for insurers, as recommended in the Federation of Small Businesses’ key attributes.
“Assessing firms’ preparedness for exiting the market in an orderly manner and working with boards to make improvements where needed, will be an increasing focus of our supervision in the next few years.”
Woods noted that the overall risks posed by market failure were significant.
“In our system, the highest standards are, rightly, applied to financial institutions that bring [the] most risk to the system,” said Woods.
“Insurers are not at the top of that list, but insurance is absolutely essential for the functioning of the economy. For example, collectively insurers are responsible for paying over £10bn of annual retirement income and a similar amount in motor claims.
“Imagine the costs to the wider economy of a disorderly failure of a single large insurer or of multiple failures thanks to a common vulnerability.”
On solvency II and the changes to come, Woods said the review would stay true to the regulation’s basic principles.
“I see no appetite to tear those up and start again from a blank sheet of paper, given the huge investment we have all made in their adoption,” he explained.
“And broadly, solvency II has served the UK well, as evidenced by the resilience of firms through the pandemic to date.
“But the regime is, in my view, somewhat over-specified and it also does need tailoring in places, particularly on the life side.
“It is common ground between us that the risk margin is not correctly calibrated, resulting in levels of offshore reinsurance, of longevity risk in the provision of UK retirement income that will become increasingly uncomfortable over time if we take no action.”