Some common gaps in data and modelling were also highlighted
The Bank of England’s Prudential Regulation Authority (PRA) has identified key areas for improvement in quantifying losses from secondary perils for general insurers and those in the Lloyd’s market.
The results of the PRA’s Insurance Stress Test 2022, published via a Dear CEO letter earlier this week (23 January 2023), found these key areas to be reinsurance and gaps in data and modelling.
The letter said: “For general insurers, the primary mitigant for losses is reinsurance from both third-party and related party reinsurers.
”The scale of mitigation varies by firm, reflecting both the quantum of gross losses they are exposed to as well as the differing reinsurance and capital strategies.
“While this exercise finds that external reinsurance is well diversified, it also highlights the importance of the availability, contractual performance and structural suitability of reinsurance protection and the need for firms to proactively manage reinsurance counterparty concentrations.”
Industry preparedness
Meanwhile, the letter also highlighted commons gaps in data and modelling.
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For general insurance and cyber losses, it said: “Current practices could lead to a misestimation of scenario impacts for individual insurers.”
Ivor Edwards, partner at Clyde and Co, said: “The PRA stress tests are an important gauge of the insurance industry’s preparedness in the face of an evolving risk landscape.
”In the face of potential rising exposures to natural catastrophes, in part due to climate change, and the increasing prevalence and sophistication of cyber-attacks, the regulator has called on insurers to bolster their risk modelling capabilities as we enter a period of high volatility and uncertainty in the market.”
Edwards continued: “Both regulators and issuers alike need to find a balance between security and liquidity. But if carriers move to improve their liquidity position this may come at a price in terms of the overall assets they hold and may have a material impact on their finances.”
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