The re-emergence of more complex reinsurance arrangements is ringing alarm bells at the Bank of England (BoE).
In a speech to the Worshipful Company of Insurers in London this week the BoE’s director of general insurance Chris Moulder, said that the Prudential Regulatory Authority will challenge firms to demonstrate that reductions in capital requirements that arise from such arrangements are commensurate with real risk transfer taking place.
“We expect the Board to ensure that the economic impact of the reinsurance transaction is appropriately reflected in business plans, capital setting and reserving; and to be alive to the wider risks to which reinsurance placements can give rise,” he said.
“This includes ensuring the total risk and uncertainty over the claims run off has been captured in your risk management system and considered within your Orsa
Moulder also took aim at insurers who are over-reliant on models in the purchase of reinsurance.
“Anecdotally, we hear that there may be an increasing reliance on models to inform the purchase of reinsurance up to the 1 in 200 point,” he said. “While this may be efficient from a regulatory capital perspective, I would caution you to challenge the uncertainty that surrounds the estimation of the 1 in 200 point and ensure that you understand the ‘noise’ either side of it.”
The soft rating environment in the London market is flashing amber on the BoE’s dashboard.
“We see premium rates in several lines continue to fall and, at the same time, extended terms and conditions are being accepted… Despite these features, many business plans will still contain some element of growth for 2016,” Moulder said.
“It is, however, important that firms that are looking to expand in current market conditions do so in a responsible and sustainable manner and are transparent with boards about how they intend to attract business.”
Moulder warned that soft market conditions can have a material impact on a firm’s risk profile and, consequently, its assessment of its capital requirement.
Noting that a number of general insurers are increasing risk appetite through increased retention, Moulder said the Bank expects boards to ensure that firms’ assessment of risk and capital requirements remain valid in the very difficult trading environment.