The executive director of insurance supervision at the Prudential Regulation Authority (PRA) opens up on the risks facing life insurers, how the regulator's competitiveness objective is being realised, and how UK insurers are exposed to complex international linkages
You've been in the executive director role for nearly nine months now – what has struck you most about the sector and the PRA's role?
Although I'm still in my first year of the executive director role, I've spent many years in and around the PRA's work with the insurance sector – from supervising some of the major life insurers during the global financial crisis, to heading our general insurance supervision divisions, and most recently as Director of Policy leading our review of Solvency II. So I know the sector well and I have seen up close the important role it plays and the value of the services it provides.
But I have also seen what can go wrong and the importance of the work we do at the PRA to make sure firms remain well-capitalised and resilient to unexpected shocks. At its heart, our role at the PRA is to make sure firms are resilient enough for the sector as a whole to provide continued financial protection and security to policyholders in good times and bad, and so insurers can support the wider economy in a sustainable way through long-term investment.
"We have a thriving domestic sector ... We also have a unique international ecosystem"
One of the things I find most enjoyable about the role is the breadth and diversity of our sector and the range of issues we deal with, at both a domestic and international level. We have a thriving domestic sector which provides important protection for retail and commercial policyholders, including an active mutual sector. We also have a unique international ecosystem around Lloyd's and the wider London market providing vital cover to policyholders for complex and innovative risks, and improving our understanding of how society needs to adapt to a changing world.
As a major international insurance centre, we have an important dual role as a 'home' supervisor of UK insurers operating internationally, and as a 'host' supervisor of many international firms operating in the UK. This dual role means we need to maintain high levels of trust in our regime, and to invest in close relationships with our international counterparts to share information and to cooperate on common issues. We do this bilaterally and in groups such as the International Association of Insurance Supervisors (IAIS), where I have just joined the executive committee as the UK's member. I've seen first-hand how much interest there is in other countries about what we are doing in the UK, and we have an influential voice in these international discussions.
What are your key supervisory priorities for the sector in 2025?
Some of our priorities for 2025 reflect important ongoing market themes we have highlighted for a while, and the need for firms to manage these risks carefully to maintain their resilience in future. For example, on the life side, we remain focused on ensuring that the expected continued growth in the bulk purchase annuity market happens in a manner and at a pace that is safe.
As noted in our letter, we expect firms to address the concerns we have about funded reinsurance, and firms should also manage and limit their exposure to complex transaction features which may introduce new risks, such as trustee termination options. We have made clear our concerns about how pricing or risk management standards in this sector could be undermined given competitive pressures.
On the general insurance side – and particularly in the London market – we are prioritising ensuring firms manage the cycle effectively. This is particularly important as some lines are under increasing pricing pressure, as exposures in other areas like cyber insurance continue to grow, and as climate change continues to affect the profile of firms' underwriting risks.
"In other areas, 2025 marks an important shift for us"
But in other areas, 2025 marks an important shift for us. I'd highlight three examples: our planned life insurance stress test; our increased focus on liquidity; and the move from policy development to implementation of our Solvency UK reforms. The first is an area where we think we can improve transparency and understanding about the resilience of the life sector.
The second builds on our experience in recent years (such as the 'dash for cash' at the onset of the Covid pandemic in 2020, and the LDI market disruption in 2022) which highlighted the need for more timely, consistent and comparable data on the liquidity positions of large UK life insurers. Finally, the third is an important example of our work to reflect the PRA's new secondary objective on international competitiveness and growth.
Can you explain what you are doing on your new secondary objective for international competitiveness and growth?
Embedding our new objective in our policymaking and supervisory approaches is a key priority for the PRA. As a prudential regulator, we think our actions affect competitiveness and growth through three main channels: the ability to attract firms from overseas; the ability of UK firms to operate internationally; and the allocation of capital in the economy. This relies on us having a trusted UK regulatory regime that is agile and responsive to innovation as new risks and opportunities arise, and in which our regulatory engagement is as efficient and effective as possible.
Given the significant role the insurance sector plays in the UK economy, including as a long-term investor, we have been keen to examine ways to advance this new objective in our insurance work. The Solvency II Review is an obvious example. We implemented an ambitious set of reforms last year and we're committed to embed the changes successfully in 2025.
"The Solvency UK reforms speak directly to our new secondary objective"
These reforms speak directly to our new secondary objective. The reforms to the matching adjustment have increased investment flexibility for UK life insurers to help them play a bigger role in supporting productive investment in the UK economy. We've set up a new team to manage this work and coordinate our engagement with firms, which has already had a positive impact. We have had good feedback on our new approach, and our engagement with firms has enabled us to turn around new applications much more quickly. Across both life and general insurance, we have also streamlined other parts of Solvency II that we felt were no longer needed – making the requirements simpler, more flexible and less costly, while maintaining high standards.
While these reforms are now complete, we're also looking at how we can go further in 2025. We are planning to consult in the first half of 2025 on a new Investment Accelerator to speed up further how life insurers can obtain matching adjustment credit for new investments. We are working with the National Wealth Fund and other investor groups to help improve understanding of the sort of investment structures that are likely to allow insurers to further expand their contribution to long term, productive investment under Solvency UK. On the general insurance side, we're enhancing our coordination with Lloyd's on our oversight of the Lloyd's market, we're improving our insurance-linked securities regime, and we're supporting HM Treasury on its consultation on a potential UK captives regime.
"A resilient market is one that is vibrant and open to new entrants"
Finally, the new objective sits alongside our existing secondary objective to facilitate competition. A resilient market is one that is vibrant and open to new entrants. In 2024 we authorised eight new insurers, and we have a healthy pipeline of other potential applications in 2025. We can play an important role here in supporting innovation and improving choice for policyholders. We don't seek to operate a zero-failure regime, so we accept not all new entrants will succeed. But where firms do fail, we want policyholders to still get the protection and continuity of coverage that they should expect. Our experience over the years of dealing with failing insurers has shown where difficulties can arise, so we are getting firms to plan better to exit the market in an orderly way if necessary – our final policy on solvent exit planning for insurers will require firms to prepare a Solvent Exit Analysis when it comes into force in June 2026.
For the life sector, it feels like an important year ahead with your work on funded reinsurance and the life insurance stress test.
Yes – the life sector is forecast to grow even more rapidly than in the last few years, and these are two of our biggest priorities in our work to ensure the life sector remains safe and sound as it grows. Existing policyholders and new ones brought in by transferring pension schemes rely on their life insurer being around for many years in the future to provide significant life savings and protections, so it is vital that we assess insurers' resilience to unexpected shocks. And the UK economy needs life insurers who have the resilience to be able to provide long-term investment in a sustainable way over the economic cycle.
"We're mindful that some market education will be required"
Our next life insurance stress test will include the publication of individual results for the first time. This is an important step to help improve market transparency and understanding of the resilience of life insurers' balance sheets under stress. We are publishing the full details of the stress scenario this month and firms have until June to submit their results to us.
We're mindful that some market education will also be required this year to help potential users of the stress test results understand how the exercise will work, and we will do this before publication of the results, which we expect to be in Q4.
On funded reinsurance, we made our concerns clear last year that life insurers needed to improve their risk management of these transactions, and we introduced new policy expectations to get all firms to an acceptable standard. Firms are working to meet these standards, but they have further to go – particularly in how they set limits to withstand scenarios where these transactions might have to unwind. In 2025 we will follow up on these gaps. Our stress test will also assess firms' resilience to a funded reinsurance recapture event, and we will keep under review whether further action is needed.
"We have been keen to increase the focus internationally on the potential risks involved in funded reinsurance"
More broadly, we have been keen to increase the focus internationally on the potential risks involved in these types of transactions, and the growing interconnectedness they create between the life insurance sector and the private equity and credit markets. The Bank of England published a chapter on these interlinkages in its December Financial Stability Report, and the US Financial Stability Oversight Council also recently examined similar trends in the US market in its Annual Report. We have good dialogue on these trends with our counterparts in the US and Bermuda, and we are also involved in work at the IAIS, which has looked at this trend in its annual Global Insurance Market Report and is due to publish an issues paper in March 2025. It is very important that this broader perspective is considered, because however strong an individual insurers' risk management controls might be over the transactions they are involved in, they can only see part of the picture and there are wider dynamics that can only be properly assessed and mitigated at a system level.
Are there any other issues you're concerned about?
With a sector as broad and diverse as ours, there are always issues which can arise that are hard to anticipate or where we have to make tough choices about where we focus our limited resources. I have a great team at the PRA whose high-quality expert input helps us decide where best to focus our efforts. But we do not aim to prevent all failures – risk and uncertainty is an inherent part of providing insurance. Ultimately, as with any other organisation, we need to make judgements on what we think are the most material issues, and we can't do everything. For example, we recently made the difficult decision to delay our planned general insurance stress test from 2025 to 2026, to make sure we could focus on the other priorities I have talked about.
In addition, beyond our sector-wide priorities, our supervisors continue to engage with firms on the individual issues that we think need most focus. I think this combination of sector-wide priorities and our individual firm dialogue means that we're hitting the right sort of issues, with the resources we have available. But given the sector continues to innovate and the world keeps changing around us, we also need to have the agility to anticipate and react – so we will continue to keep our priorities under review in 2025 and beyond.
