UK general insurers met the recent regulatory stress test conducted by the Prudential Regulation Authority (PRA) and demonstrated higher quality results than the last time an assessment was conducted in 2015. But, in a letter to general insurance firms, the PRA highlighted several areas for improvement.
It said few firms use more than simple loading to reflect weaknesses in their natural catastrophe models. It said scenarios should test risks that are not already captured in catastrophe models, for example flooding from rains brought by hurricanes or tsunamis following earthquakes.
“Firms are encouraged to improve their ability to reflect these risks as their models evolve. Boards are encouraged to understand what the limitations are with the catastrophe modelling, and their inherent uncertainty when applicable, especially for their key perils,” wrote the PRA.
Overall, the regulator found the UK general insurance sector resilient to scenarios set out under Solvency II. It found no evidence of an increase in reinsurance interconnectedness, and recorded a reduction in the concentration of risk to individual reinsurers since 2015. The PRA said alternative capital remains an important part of reinsurance panels.
The regulator added that for some firms, the recent stress tests identified areas for improvement when it comes to exposure management. It said firms could do more to address how accumulations of exposures are monitored and reported to the board.
It noted that several firms struggled to anticipate changes in their Solvency II basic own funds, which it attributed to firms underestimating the preparation needed ahead of accounting changes.
The next stress test will take place in 2019. Before then, the PRA said it will follow up with firms where results are inconsistent with stated risk appetite, or where firms have been identified as outliers.
Full article on Commercial Risk (subscription required)
© Commercial Risk Europe
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article