The PRA is responsible for the micro-prudential regulation of all deposit taking institutions, insurers and banks. It was set up as a subsidiary of the Bank of England in order to bring both the macro and micro-prudential oversight of financial institutions within one body. Where the FPC identifies wider market issues which need addressing, it will request that the PRA take regulatory action to address any concerns with individual firms. For insurers, the PRA has a remit for the oversight of firms with permission for effecting and/or carrying out contracts of insurance.
The PRA has two statutory objectives: a general objective to promote the safety and soundness of the firms it regulates and an objective specific to insurance. The FS Act inserted a new section 2C into FSMA specifying the PRA's insurance objective to contribute to the securing of an appropriate degree of protection for those who are, or may become policyholders.
The insurance objective is designed to recognise the correlation (especially in with-profits policies) between the management of risk and consumer outcomes. The application of the objective to those who may become policyholders has the potential to cause confusion, as noted by a number of respondents to the June 2011 paper, who questioned whether the reference to “future policyholders” could prove to be ambiguous. Despite further criticism, most notably in a report by the Joint Committee of both Houses of Parliament, the standalone insurance objective was chosen in favour of cross-sectoral objectives. In an October 2012 speech, CEO of the PRA, Andrew Bailey declared that “the public interest” justified a specific insurance objective reflecting the very long-term nature of some insurance policies and is a key feature of the amended FSMA.
A joint BoE/FSA paper, entitled The Bank of England, Prudential Regulation Authority - Our approach to insurance supervision, confirmed that the PRA would have a concurrent objective to seek to minimise the adverse impact that either the failure of an insurer, or the way it carries out its business, could have on the stability of the system. Prior to legal cutover, the FSA frequently stated that the new legislation was not aiming for a zero-failure regime. Instead, the regulatory focus is on ensuring that where firm failure does occur, it is managed in an orderly way thereby minimising adverse affects on policyholders and disruption to the financial system.
The PRA has adopted a "judgement-based" supervisory approach. Practically, this means that the nature and intensity of the PRA's supervision will be commensurate with the level of risk a firm poses to policyholders and to the stability of the system. Whilst there is an acceptance that insurers are not systemic in the same way as banks, when judging the risk posed by a firm the PRA will consider various factors, for example, the combination of insurance and banking in a single group that may give rise to system-wide risk if the failure of the insurer threatens the financial condition of the bank. Furthermore, the investment decisions of insurers can accentuate movements in asset prices and groups containing an insurer may undertake non-insurance activities that bring risk to the system.
In an effort to move away from the much criticised “box-ticking” style of FSA regulation, the PRA will take a forward-looking approach to supervision. As such it assesses insurers not just against current risks, but also against those that could plausibly arise in the future. The level of supervisory interaction will depend on an insurer’s categorisation. All firms are divided into five categories of impact. Category 1 firms are the most significant insurers whose size, interconnectedness, complexity and business type give them the capacity to cause very significant disruption to the UK financial system and to the interests of policyholders, whilst category 5 firms are those that have no capacity to individually cause disruption to the financial system or to the interests of policyholders.
Dual-regulation means that not only are insurers supervised by the PRA and FCA, but also that policyholders are protected by both regulators. Whilst the PRA looks to ensure that an insurer is likely to have sufficient financial resources to meet its obligations to policyholders as they fall due, the FCA's role as conduct regulator is to ensure that consumers are treated fairly in all their engagements with insurance firms.