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abcd. FSA’s approach to Prudential Regulation - general insurance proposals Peter Hinton Insurance Technical Risk Financial Services Authority 19-20 May 2003 Scarman House. Legal background Risk based supervision Regulatory reporting Enhanced capital requirement

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  1. abcd FSA’s approach to Prudential Regulation - general insurance proposals Peter Hinton Insurance Technical Risk Financial Services Authority 19-20 May 2003 Scarman House

  2. Legal background Risk based supervision Regulatory reporting Enhanced capital requirement Individual capital adequacy standards FSA’s approach to Prudential Regulation - general insurance proposals

  3. FSMA 2000 Integrated supervisor FSA Handbook Legal background

  4. Regulatory objectives Principles of good regulation Ability to make rules and issue general guidance Need to consult FSMA 2000

  5. Market confidence Public awareness Protection of consumers Reduction of financial crime Regulatory objectives

  6. Efficient use of resources Role of management Burden or restriction proportionate to benefits Facilitate innovation International character of financial services and competitive position of UK Minimise adverse effects of regulation on competition Facilitate competition between regulated persons Principles of good regulation

  7. Act has 433 clauses but is merely framework FSA rules and guidance contain detail More flexible than legislation despite process Must consult masses of consultation papers YOUR opportunity to influence things also pre-consultation Rules and guidance

  8. All firms in a group have common supervisor Treat similar risks similarly in different types of firm but allow for differences justify or change historic practices Insurance technical risk part of Prudential Standards PSD includes capital, credit risk, liquidity, etc teams advise on all types of firm preparing rules for all firms Integrated supervisor

  9. High level standards PRIN, SYSC, COND, APER, FIT, GEN Business standards IPRU(INS) Regulatory processes AUTH, SUP, ENF, DEC Redress Specialist sourcebooks LLD FSA Handbook

  10. 3 - Firm must have adequate risk management systems 4 - Firm must maintain adequate resources 11 - Must be open with regulator and tell FSA anything we could reasonably expect These are rules Principles for Businesses

  11. Prudential rules rolled over at N2 Not yet integrated CP 97 in June 01 Continuing consultation First step insurance (+ some general rules) Life insurance General insurance EU solvency margin too low Guidance on what capital is adequate FSA Handbook

  12. Risk = risk to FSA objectives Risk = impact X probability More effort on larger firms Nature of customers Degree of risk Rules haven’t changed: practice has Risk based supervision

  13. Backward looking More information on risks and controls Exception reporting What data does the firm use? Comparisons across the industry New reporting classes? What existing information can/should we drop? One-off requests are expensive Regulatory reporting

  14. EU solvency requirements too low Insufficiently focused on risk Any competent GI actuary or insurance manager could do better Best is enemy of good Enhanced capital requirement

  15. ICP3a consultation shortly: likely proposal Factor X asset value Factor X net technical provisions Factor X net written premium in last year ECR = total Factor depends on nature of asset, class of business. Uses information in returns. No diversification credit Exclude: mutuals not subject to solvency 1, firms in formal run-off by end 04 Enhanced capital requirement

  16. Firm must hold higher of ECR & MCR (rmm) Equalisation reserves & innovative tier 1 count towards ECR (but not MCR) Factors in ICP3 will be tentative both level and relativities Average between 2x and 3x rmm Subject to revision following consultation Analysis for FSA by actuarial firm ECR applies from end 2004 Enhanced capital requirement

  17. Adequate overall financial resources; no significant risk that liabilities cannot be met Assess financial resources needed Identify major sources of risk Stress and scenario tests Realistic: can liabilities be met? wef 1/1/05 FSA guidance but no mandatory tests or prescriptive approaches Individual capital adequacy standards

  18. FSA will review initial self-assessment (standardised format) Individual Capital Guidance ECR sufficient Give ICG consistent with firm’s assessment Give ICG higher than firm’s assessment Waiver of ECR if FSA agrees excessive Plan to restore sound financial position if breach of ECR or ICG S45 OIVOP if firm does not accept ICG Individual capital adequacy standards: probable procedure

  19. No routine reporting Internal documentation ICG / ICAS assessed as part of continuing monitoring during supervisory visits Frequency depends on firm Firm’s own capital assessment private ICG not published Individual capital adequacy standards: probable procedure

  20. Questions & comments? How will this affect you? How will this affect your firms / clients? Are proposals practical? Are proposals sensible? Are proposals proportionate? FSA’s approach to Prudential Regulation - general insurance proposals

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