Consultation Paper | CP32/16 issued by the Prudential Regulation Authority (PRA)
The ‘insurance cycle’ is a phenomenon that has been characteristic of the insurance industry since the 1920s. The cycle consists of a ‘soft period’ in which premiums are low, capital base is high and competition is consequently high. Premiums continue to fall as some insurers offer cover at unrealistic rates, and established businesses are forced to compete or risk losing business in the long term. This period persists for some time until such time as a catastrophe takes place, which leads to an increase in claims, fall in profits, and an increase in premiums. Smaller companies are driven out of business and even the larger insurers come under stress. Such an event, which affects the insurance industry at large, is referred to as a Market Turning Event (MTE).
This consultation paper (CP32/16) issued by the Prudential Regulation Authority (PRA) outlines its expectations from general insurance firms with respect to significant loss events which might impact the firms’ solvency and future business plans in the event of an MTE.
The CP32/16 outlines its expectations of firms affected by an MTE under the following four broad headings:
The PRA concludes this document by stating that it expects firms to consider what longer-term lessons might be drawn from the event, so that they are better prepared for similar events in the future. Some factors that the PRA would expect a firm to consider include what lessons might be drawn for the robustness of previous assumptions, modelling techniques, processes and controls; and whether any crisis management, disaster recovery or business continuity arrangements invoked by the firm operated as expected during the event, or are there any changes needed to improve the firm’s response to the similar future events.