12 February 2013

FSA/Adams: What are the lessons for insurance supervisors from the recent financial crisis?

In his speech, Adams looked at the practical challenges the financial crisis has raised for prudential regulators of insurance companies, as well as some of the implications for the PRA's supervisory approach.

Mr Adams suggested three overarching themes:

• there is an imperative to ensure that the regulatory capital regime appropriately captures the risks assumed;
• that no single firm or group should either be too big to fail or whose failure should be allowed to seriously disrupt the provision of core financial services to the real economy; and finally
• there is a need for regulators to be alert to changes in the activity of non-bank firms (often – but not always – which sit outside of the regulatory perimeter), which result in them assuming risk which economically looks like banking.

He further examined the extent to which insurance supervisors have reflected on these themes.  He discussed how the collective response to some contemporary key issues is conditioned by how we some of these imperatives are responded to.

Mr Adams said at the outset of his talk that he wished to avoid simply repeating the PRA’s approach document. Instead he examined the implications of three important challenges facing insurance supervisors at the moment namely: how we ensure that the solvency regime (whether we use Standard Formula or internally developed models) adequately captures the risks being assumed by insurance companies, what resolution in a non-zero failure world might look like and the potential for the emergence of new risks in insurance markets that could give rise to risks to the wider financial sector or society more generally.

“In essence, we cannot be said to have learnt the lesson of the crisis unless we apply effective and critical judgement when considering the outputs of the capital framework we use regardless of whether they are generated by standardised formulae or internal models. We have to build a robust resolution framework such that it sits comfortably with a ‘non zero-failure’ regime, otherwise we cannot have properly reflected upon failings in the banking sector.

“And without adopting a forward-looking approach that considers not only the risks in the current operating environment but also how they might be shaped by possible developments to the economic environment, we will again suffer from the lack of foresight which encouraged such overconfidence in the middle part of the last decade."

Full speech

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