Earlier today the Bank of England and the Financial Services Authority set out their latest thinking on the approach the Prudential Regulation Authority (PRA) will take to regulating insurance companies.

Within the new framework, the separation of responsibility for prudential and conduct of business regulation for systemic firms, allows for the creation of the Financial Conduct Authority (FCA), in addition to the PRA.

Insurers have long been calling for recognition on the part of the new PRA to have a distinct approach when it comes to supervising the sector, and yet today's paper leaves open more questions than it provides answers, according to Bruno Geiringer, a partner in the Insurance group at law firm Pinsent Masons.

“Insurers will welcome Hector Sant's assurance that the PRA's costs will not exceed the current cost of the FSA's newly formed Prudential Business Unit and that a new group in the PRA will focus on the regulation of mutuals and friendly societies in recognition of the diversity in the ownership structure they offer,” Geringer said

“However, concerns still remain on the overlaps and underlaps in the supervision of insurers by the PRA and the FCA, given that the criticism of the past was a lack of a joined-up approach. Crucial will be the impact the PRA has in Europe as the regulation of insurance is so dominated by the impending implementation of the EU Solvency II directive,” he added.

“It is hoped that the PRA will be able to attract the right resources to undertake its objectives successfully in the UK and in Europe. Strangely, nothing was said about how the PRA will go about publicly engaging with and winning back the confidence of policyholders that insurers are going to be a safe, well run and beneficial business in which to invest premiums for their future well-being and peace of mind.”

But pressure from investors and the markets will mean it is likely that the larger insurers will still work towards being compliant for a 1 January 2013 deadline.

Commenting on the statement, Jim Bichard, insurance regulatory partner at PwC, said: “Despite the current rumours of a slippage to the Solvency II deadline, the FSA has made it clear that insurers in the UK should not take their foot off the pedal and adjust or delay their implementation plans.

“The PRA has made it clear it will take a more forward-looking approach to setting capital, which it expects to be mirrored by insurers. This is a big change and will see boards asking more ‘what if’ questions through the use of stress and scenario testing. Insurance companies will also need to have explicit resolution plans in place, which is a significant departure from previous regulatory approaches."

The PRA is set to regulate the insurance sector in a more focused way through a greater use of analysis and benchmarking. In order to do this, Pat Newberry, chairman of PwC’s financial regulation practice, says insurers will be required to provide far more precise information and will also be expected to improve the accuracy of the data going into their internal models.

“In order to avoid ending up with a potentially higher regulatory cost, insurers need to take the opportunity to influence the debate on what constitutes the definition of an 'appropriate level of policyholder protection', as this will be driven by legislation that is yet to be finalised.”

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