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Insurance Bulletin, November 2017 Edition 4

In this issue: Regulation and legislation; Market developments; HFW publications and events

1. Regulation and Legislation

UK: PRA "Financial Management and Planning by Insurers" Consultation Paper published

The Prudential Regulatory Authority (PRA) has published consultation paper CP23/17 (CP) seeking views on its draft supervisory statement (SS) (which is set out in the Appendix to the CP) on the effective financial management and planning by insurance firms and groups.

The CP is relevant to all Solvency II UK insurance firms and groups and to the Society of Lloyd's and managing agents.

The PRA has stressed that the purpose of the draft SS is not to set new expectations, but rather to complement existing policy material. The PRA expects that most insurers will already be meeting the expectations set out in the draft SS.

Summary of Proposals

The purpose of the draft SS is to set out how effective risk management and governance can be linked with the need to maintain a sound financial position. The PRA states that it is especially important for insurers with a high risk appetite or whose capital levels fluctuate significantly to have effective financial management and planning in place.

The draft SS covers the following:

  1. The development and maintenance of a risk appetite statement by an insurer
    Such a statement must be approved by the board, documented in clearly understandable terms, contain a level of detail commensurate to the nature, scale and complexity of the risks borne by the insurer, and be communicated appropriately within the insurer. The statement should include risk tolerance limits for various types of risk, the levels of capital expected to be maintained in reasonable foreseeable market conditions, and the insurer's appetite for the level and volatility of future dividend payments that it would be willing to make.
  2. The application of the risk appetite to an insurer's business and financial plans
    The PRA expects firms to have business plans consistent with their risk appetite and risk tolerance limits. The PRA proposes that insurers address risks by developing plans and management actions for managing ongoing levels of capital resources, and developing planned management actions in response to stress scenarios. Insurers' Own Risk and Solvency Assessment should also assist in ensuring that there are effective links between the business plans, risk appetite and capital management plans. Regular Management Information (MI) should be maintained and provided to the board and to relevant senior managers in order to monitor the performance of the insurer against its business and financial plans.
  3. The assessment of the suitability and sustainability of capital distribution plans in the context of risk appetite.
    The PRA expects insurers to be able to demonstrate that any planned dividend payments are appropriate in the context of actual and projected business performance, the current and future capital position and the insurer's risk appetite.

    The draft SS confirms that the PRA no longer expects insurers (other than insurers in run-off) to ask for the PRA's pre-approval of dividends, provided that:

    1. The insurer is within risk appetite.
    2. The proposed dividend leaves its capital position within risk appetite and is likely to remain so.
    3. The insurer's Solvency Capital Requirement coverage ratio is above 100%.

UK: FCA Set to Review Broking Practice in the Wholesale Market

On 8 November 2017, the FCA launched its Wholesale Insurance Brokers Market Study, which is aimed at furthering the ambition of the FCA to ensure that London remains as an international centre for insurance.

The purpose of the study is to assess the role of brokers in the wholesale insurance market, and to ensure that the market works in such a way as to provide purchasers with access to appropriate coverage at fair value. It arises from a concern that the manner in which wholesale brokers operate in London results in either unnecessarily expensive premiums, or in driving insurers out of the London market.

The study's terms of reference identify three topics which it will cover:

  1. Topic 1: "Market power" – do individual broker firms possess market power and if so is this harming competition?
  2. Topic 2: Conflicts of interest – what conflicts, if any, exist in the sector and what is their effect on competition and firm conduct?
  3. Topic 3: Broker conduct – to what extent does this affect competition in the broker sector? Could some actions risk excluding firms from the underwriting sector?1

Topic 1 will look into concerns raised by some stakeholders that some broking firms may hold a disproportionate level of power in the market enabling them to charge higher commissions, or to get underwriters to sign up to facilities.

Topic 2 will consider matters such as the effect of broker facilities on the choice of underwriters. The FCA has said it will consider "if there is evidence that brokers are placing business within facilities, which may yield greater remuneration to the broker, even if these are not in the best interests of their clients" and whether "pay-to-play agreements exist... and how they may exacerbate potential conflicts of interest”. The FCA is also interested in "tying of reinsurance" to underlying insurance and the practice of broker owned MGAs, both of which may potentially give rise to conflicts of interest.

Topic 3 will look at allegations that some brokers exclude insurers or dampen competition by tacit cooperation with other broking firms.

Responses to the study have been requested by 18 January 2018 with an interim report scheduled for the autumn.



2. Market developments

EU: Harmonising Cyber

The European Network and Information Security Agency (ENISA) issued a report last week on the "Commonality of risk assessment language in cyber insurance". The aim of the report is to encourage and facilitate harmonisation in the cyber insurance market. Its findings and recommendations are valuable reading for those who have an interest in what is probably the fastest growing sector of the insurance industry.

A notable finding of the report is that despite the diversity of cyber insurance products on offer (and consequent buyer confusion) there is considerable consistency between the coverage offered, if one looks past the varying terminology.

In contrast, however, there is lack of uniformity of underwriting practices (as well as policy wordings). This flows from lack of consensus as to which security standards underwriting questionnaires should be based on.

It is of course true that certain cyber threats may pose a higher risk for some sectors than for others, depending on the nature of their business. However, whilst recognising this, the ENISA report makes a strong argument that, notwithstanding valid concerns about competitive advantages, the cyber insurance industry and its future clientele would benefit from greater consistency of both policy wordings and risk assessment. Consistent language in policies would ease product comparison and so make the prospect of buying cyber insurance less bewildering, particularly for small enterprises without dedicated risk managers. At the same time, by progressing towards consensus on the appropriate standards, it is suggested that the sector can move away from underwriting based on value judgement towards a more quantitative approach. This could in turn facilitate better analysis of aggregation or accumulation scenarios, thereby enabling better management of capital and enticing reinsurance capacity.

3. HFW publications and events

London: HFW hosts LIRG meeting

On 28 November HFW is hosting the London Insurance and Reinsurance Group meeting which will be chaired by Partner Christopher Foster. For further details please contact

HFW at Bermuda Business Development Agency conference

On 28 and 29 November, Partner Richard Spiller is attending the "beyond Convergence" conference and reception arranged by the Bermuda Business Development Agency.

UK: HFW seminar - How well do you know the French legal system?

Partners Olivier Purcell, Pierre-Olivier Leblanc and Pauline Arroyo are hosting a seminar in the London office on Thursday 7 December on the French legal system. If you would like to attend please contact

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