Competing on a Global Stage − speech by Shoib Khan

Speech

There have been two big events relating to competitiveness in recent months. One of them was a series of sporting gatherings in Paris over the summer that some of you may have been following; but today I want to talk about the other, more important, one - which is the first anniversary of the PRA’s Secondary Competitiveness and Growth Objective (SCGO)^{footnote [1]}.

The SCGO sits alongside the PRA’s existing secondary competition objective. It was introduced last year by Parliament and requires the PRA to discharge its general functions to advance its primary objectives, in a way that facilitates international competitiveness and growth of the UK economy - as far as reasonably possible and subject to alignment with international standards. Today I will focus on some of the initiatives we are taking in our oversight of the UK insurance sector to deliver on this new objective.

We aspire to facilitate the UK’s international competitiveness and advancing the SCGO through three regulatory foundations: (i) Maintaining trust in the UK prudential framework; (ii) Adopting effective regulatory processes and engagement; and (iii) Taking a responsive approach to UK risks, opportunities, and innovation. These, in turn, can enable insurers to allocate capital more efficiently, compete in international markets; and attract investment to the UK.

The UK Insurance sector

We’re all aware of the significance of the UK insurance sector and the vital role it plays in the UK economy, serving households and businesses. It is the third largest market for insurance and long-term savings in the world and the largest in Europe^{footnote [2]}, contributing £36 billion to the UK economy^{footnote [3]} and employing over 300,000^{footnote [4]} people. The wealth of insurance expertise in the UK underpins the attractiveness of the UK to international insurers and the ability of UK insurers to compete overseas.

The SCGO codifies the PRA’s approach to supporting the UK’s status as a global insurance market. We think that when you transact in the UK, our robust legal and regulatory framework mean that policyholders should be confident that they can enforce their claims, and that insurers will have the means to pay. And that’s why the SCGO supplements our primary objectives of safety and soundness and policyholder protection.

It's worth noting that the SCGO applies when we exercise our general functions - in other words our policymaking and supervisory approach. It does not apply to individual firm decisions. That being said, as we evolve our approach and respond to innovation, we will take into account what firms tell us about how we are impacting competitiveness and growth.

A differentiated Supervisory Approach for Insurers

The PRA is clear that innovation and efficiency are key features of the attractiveness of the UK’s insurance sector; and that requires a robust but proportionate regulatory approach to support it.

One way in which we do this is by taking a differentiated supervisory approach - clearly between banks and insurers, but also for the different segments within insurance - namely life insurance, general insurance, the London Market, and branches of overseas insurers - informed by their varying levels of risk to our objectives.

Life insurers

Higher interest rates have led to a significant increase in demand for Bulk Purchase Annuities (BPA) as defined benefit schemes in surplus seek to de-risk. UK Life insurers wrote a record-breaking £50 billion^{footnote [5]} of BPA business in 2023, and some analysts estimate that c.£400–600 billion^{footnote [6]} of liabilities may be transferred to UK life insurers through BPA deals over the next decade.

So how can more BPA business support competitiveness and growth? Firstly, annuity providers are well-placed to support growth in the UK economy through their investment strategy. Second, transferring pension liabilities to insurers can enable corporates to focus on their core business to the benefit of the economy.

The PRA has recently made policy changes that are particularly relevant to the BPA market, and any PRA insurance speech would be incomplete without a reference to the regulatory reforms undertaken as part of ‘Solvency UK’. Moreover, to discuss life insurance without mentioning the Matching Adjustment (MA) would be regulatory sacrilege! These reforms will allow firms to play a bigger role in productive investments in the UK economy and support delivery of competitiveness and growth, though much will depend on insurers’ investment choices and the extent of investments made in the UK.

For our part, within insurance supervision, we have established a new specialist team to streamline our decision making of MA applications, including for productive assets. As my colleague Gareth Truran remarked in his recent speech^{footnote [7]}, insurers now have what they need to use the Solvency UK reforms to support their plans for UK productive investments. The onus is now on firms to make the most of the opportunity the reforms present.

I’d also like to flag that we have seen a growing appetite for the use of funded reinsurance (Funded-Re) in the BPA market. Market participants tell us that the rationale for these arrangements include capital optimisation and asset origination limitations.^{footnote [8]} But we have made clear that, if not properly controlled, the growth of Funded-Re could lead to a rapid build-up of risks in the sector, and our policy seeks to mitigate such risks, including the potential of recapture. We have asked firms to undertake a gap analysis by the end of October on whether they meet our expectations and we have made clear that we will keep under review whether we need to take further action such as explicit regulatory restrictions on the amount and structure of Funded-Re, or measures to address any underestimation of risk, or regulatory arbitrage, inherent in these transactions.

In developing our policy for Funded-Re^{footnote [9]}, we have sought to advance our primary objectives while also considering the impacts on the SCGO. Our aim is that Funded-Re arrangements are managed and modelled to a consistent and appropriate set of standards across the UK insurance industry, helping ensure a level playing field so that some insurers do not use funded reinsurance transactions in an imprudent way. Our policy will enable UK life insurers to continue to provide annuity products to policyholders in a sustainable manner and invest in a way which supports long-term economic growth.

Looking ahead, we continue to engage closely with the industry and have received positive feedback^{footnote [10]} from our recent Innovation Roundtable and our engagement with industry via Subject Expert Groups relating to the Matching Adjustment and the MA Sandbox. To support innovation within the life insurance sector, we are considering how to take forward a so-called “Accelerator” initiative to facilitate future expansion of MA eligibility, including the possibility of allowing some degree of self-certification of new investments within existing eligibility rules.

Other reforms

Whilst important, the MA reforms can overshadow that Solvency UK was a wide package of reforms with many other initiatives. Important changes include streamlining our approach to Internal Models, simplifying TMTP calculations, and allowing firms greater flexibility in calculating the Group solvency requirements. All of these were designed by the PRA to reduce the regulatory burden on firms – reducing cost and increasing efficiency - whilst maintaining robust prudential standards.

We have also reduced the reporting and disclosure burden on insurers. The changes will come into effect at the end of 2024 and will result in a net removal of around a third of the templates currently required. This makes it easier for firms to get on with running their business whilst ensuring that the PRA has the data to do its job.

One important guardrail that I would like to flag is our intention in 2025 to publish, for the first time, firm specific stress test results for our major Life Insurers which will enhance market disclosure and, in turn, market discipline.

The authorisations regime has an important impact on competitiveness. That includes continuing to support new market entrants, where we have authorised 58 new insurers^{footnote [11]} since the PRA’s inception; and every year we approve around 600 individuals for senior manager regime positions in insurance firms. Working with the FCA, we have addressed delays in senior manager approvals, resulting in meeting our target of deciding cases within three months consistently since June 2023. We are now accelerating the clearance of the majority of straightforward cases, with half of them now dealt with in under 57 days, down from 87 days in early 2023.

We have also introduced a new ‘mobilisation’ regime to facilitate entry and expansion for new insurers. This is an optional stage for up to 12 months when a new insurer would be authorised and operate with restrictions while it completes the final aspects of its development. Mobilisation has been successful within the banking industry and could have a positive impact on sustainable economic growth in the UK by improving ease of entry^{footnote [12]} to UK insurance markets.

Third-country insurance branches

The UK market has always attracted international insurers looking to take advantage of its insurance expertise and strong legal and regulatory framework. Branching offers over 160 overseas insurers a convenient way to access the UK.

The PRA recently published an updated approach to the authorisation and supervision of Insurance Third Country Branches.^{footnote [13]} This clarifies our openness for insurers – particularly those focused on wholesale markets – to operate in the UK as a branch and may facilitate more international insurers to apply to operate in the UK through a branch, given that applications will be assessed against a clear set of criteria.

A fundamental part of our approach to branches is working with home state supervisors, whom we seek to rely on in supervising the whole insurer where we have confidence of equivalent regulatory standards and supervisory cooperation. We work with home state supervisors to identify risks that could affect the UK branch or policyholders and have taken steps to remove unnecessary regulatory duplication.

The PRA has also implemented reforms under Solvency UK to remove branch capital and asset localisation requirements and, consequentially reduced branch regulatory reporting.

London Market

Whilst innovation must be industry led, the PRA is seeking to create a regulatory environment that supports innovation and is responsive to the specifics of the UK market. This includes the London Market, which makes a crucial contribution to the UK’s position as a global insurance centre.

The London Market is a leading place to underwrite large and complex risks internationally. It remains the dominant market for specialty insurance classes capturing over 40% of global market share^{footnote [14]}.

One such example is the evolution of the UK cyber insurance market as the largest cyber market in Europe. It benefits from a deep expertise in cybersecurity and underwriting which has made it a natural hub for cyber risk taking^{footnote [15]}. The PRA recognises the growing importance of this activity given evolving cyber threats at a time of increased geopolitical uncertainty^{footnote [16]} such that our supervisory expectations around, for example, capital and exposure risk management, have allowed firms to develop these as the market grows.

I’ll now move on to what comes next – some of which also relates to the London Market…

What’s next?

Insurance Special Purpose Vehicle (ISPV) Regime

Another area where the PRA is seeking to reform and improve efficiency of is the UK ISPV regime, along with necessary changes to PRA rules and legislation. The PRA expects to consult on a package of reforms to the UK ISPV regime in coming months, intended to:

• allow a wider range of transaction structures in the UK regime;
• streamline and speed up the application and approval processes, thereby also reducing costs for applicants; and
• clarify the PRA’s expectations of UK insurers who cede risks to ISPVs, wherever they are established.

Alongside these reforms, I can share with you that we intend to consult later this year on introducing a new, accelerated pathway for catastrophe bond applications. Commonly known as ‘cat bonds’, these vehicles have been effective in transferring insurance risks into capital markets for several years, and benefit from high levels of standardisation. In collaboration with the FCA, we plan to share information on how we will review complete applications within 10 working days rather than our current 4–6-week process. We will share more information on the proposal for how this pathway will operate as part of the wider package later in the year.

Working effectively with the Society of Lloyd’s

Lloyd’s, as a market, plays an essential role in the vibrancy of the London Market. Both the PRA and the Society of Lloyd’s have a role in regulating the Lloyd’s market, and we work closely together, supported by a public Cooperation Agreement. Lloyd’s managing agents, as PRA-authorised firms, are supervised to the same standards as all other PRA firms, but Lloyd’s also provides oversight over Managing Agents and, in recent years, has implemented its Principles Based Oversight framework to enhance that oversight. So, we have been carefully considering how we can enhance our current cooperation. For example, we are working with Lloyd’s and the FCA on how we can make the process for authorising Managing Agents quicker, and we think we can coordinate more with Lloyd’s to ensure our oversight of Managing Agents is effective and efficient. To this end, we have also modified our categorisation for Managing Agents. While the categories will remain subject to review, the impact for affected Managing Agents will typically be a lower level of supervisory interaction with the PRA. These changes should reduce duplication and regulatory costs to support the competitiveness of the London Market without compromising prudential standards.

Implementation of regulatory reforms is a key focus for the PRA

We will continue to seek new opportunities to achieve the SCGO. We are also currently consulting on an important piece of the jigsaw which is to move the remaining parts of our prudential regime which we have inherited from the EU, and are still locked in legislation, to our rulebook. Once this process has completed, the Solvency UK regime will be mostly^{footnote [17]} in the PRA’s policy domain, giving us more flexibility to tailor and evolve the regime to the needs of the UK market in ways that we have not previously been able to. We are working with HMT to deliver this work, which includes their repeal of the relevant legislation, so that we can incorporate the relevant parts of Solvency II in our rules. We remain on track to complete this work by the end of 2024.

Conclusion: Primary and secondary objectives

Now, a reasonable question to ask is how the PRA is confident that it is fulfilling its secondary objectives, as far as possible, whilst delivering its primary objectives. We see these objectives as complementary and I have spoken today about a range of measures to deliver change, including to increase investment freedoms and reduce regulatory processes on insurers.

We are held to account through formal mechanisms, including annual reporting on the secondary objectives as required by legislation^{footnote [18]}, the PRA practitioner panel, a new Cost Benefit Analysis Panel and the Bank’s Independent Evaluation Office who recently published a report on the PRA’s approach to SCGO^{footnote [19]}. We are always keen to hear ideas from industry on places where we can make improvements to support delivery of our secondary objectives – without undermining our primary objectives. I hope you will continue to constructively engage with us and provide us with feedback.

I started today with a reference to the Olympics, and I am going to conclude by returning to that theme. As some of you will know, the Olympic motto is Citius, Altius, Fortius – Communiter. Or for those of us not so fluent in Latin, Faster, Higher, Stronger – Together. And that is quite apt for summing up what I have said today:

• We have been working to make our processes faster – such as streamlining authorisation and MA applications, alongside removing burdens which unnecessarily slow down firms.
• Unlike an Olympic high jumper, we’re not looking to continually raise the regulatory bar - but it is important that we maintain – and where necessary have higher standards to ensure financial soundness and policyholder protection, such as our work on Funded-Re.
• We think by doing both these things, the reputation of the UK as a trustworthy, efficient, and responsive place to transact insurance business will therefore be stronger.
• We have delivered a package of reforms under Solvency UK and have further initiatives in the pipeline; but it is important that we work together to identify where we can continue to enhance our policies and the way we supervise.

The UK is, therefore, well-positioned with its robust and effective regulatory regime. Our differentiated supervisory approach, tailored to different sectors of the insurance industry, is key in enabling us to deliver the PRA’s secondary objectives and support the UK economy in going for gold.

I am grateful to Mike Beattie, Stephen Walton, Fariha Husain, Gareth Truran, David Bailey, Lucy Allen, Nimra Mahmood, Sam Fletcher, Manuel Sales, Alan Sheppard, Elina Mentzelopoulou, Vithushan Sivanathan and Jonathan Haynes for their assistance in preparing this speech.