UK: Third-country insurance branches – PRA publishes feedback and updated policy

The PRA published in May a Policy Statement (PS 8/24) on its updated policy in respect of authorising and supervising insurance branches. Although the Policy Statement largely consolidates the PRA’s existing approach, it includes various clarifications, including on branch reporting and SM&CR requirements.

Background

In 2023, the PRA consulted on its proposals to consolidate and formalise existing PRA policy on overseas insurers that write business in the UK through the establishment of a third-country branch, and to offer more clarity on its expectations in respect of those third-country branches. The PRA proposed to make these changes in light of its experience of authorising and supervising third-country insurance branches following the UK’s withdrawal from the EU.

In response to the feedback it received, the PRA has now published Policy Statement PS 8/24, which sets out the final relevant policy and provides various further explanations and clarifications. The Policy Statement includes the final version of a new statement of policy on the PRA’s approach to insurance branch authorisation and supervision.

Branch reporting – ORSA

In particular, the PRA has clarified that branches can submit either a standalone branch own risk solvency assessment (ORSA) for the branch, or a legal entity ORSA. Any submitted ORSA must cover at minimum the requirements set out in paragraph 9.3 and 9.5 of the updated SS 44/15, which is also included in the Policy Statement. SS 44/15 will be updated again in December 2024 to incorporate changes arising from the Solvency UK reforms. 

The PRA has confirmed that it does not require notification from firms on their intended approach.

In respect of third-country branches incoming from non-Solvency II jurisdictions, the PRA considers that ORSA-equivalent reports may be sufficient subject to conversations with the firm’s PRA supervisor.

SM&CR – key function holders

The PRA has also clarified the application of its key function holder requirements to third-country branches. The PRA requires third country branch undertakings to establish the four minimum key functions (risk management, compliance, internal audit and actuarial) in respect of the branch’s operations, and the relevant individuals responsible for these key functions to be notified to the PRA for an assessment of their fit and proper status if they will not directly be in either a PRA SMF or FCA controlled function.

The PRA has further clarified that where a third-country branch undertaking has a key function holder acting as Chief Finance Officer, Chief Risk Officer, Chief Actuary, Chief Underwriting Officer or Head of Internal Audit functions and that person’s role is solely dedicated to the branch, then it would expect the firm to apply for approval for the relevant functions. Conversely, where that individual’s role is not wholly dedicated to the branch, the PRA would not expect them to apply for approval, but they should still notify the PRA of their identity and provide relevant personal information as appropriate. The third-country branch undertaking should assess whether that individual is carrying out the role of a Group Entity Senior Manager (SMF 7), in which case they must apply for PRA approval.

Other clarifications

The Policy Statement sets out some additional clarifications, including those summarised below:

1. Notifications – in the updated SS 44/15, the PRA sets out some examples of circumstances in which it would expect notification from third-country branches in line with its Fundamental Rule 7.
2. Outwards reinsurance arrangements of the third-country branch and third-country branch undertaking – the PRA’s approach to assessing intra-group reinsurance arrangements focusses on risks to branch supervisability and independence, where the third-country branch undertaking may become operationally heavily dependent on an intra-group entity. In assessing outwards reinsurance arrangements of a third-country branch and a third-country branch undertaking, the PRA will take into account the views of the firm’s home supervisor.
3. Resolution – the PRA has set out its assessment criteria for considering UK policyholder protection and fairness of treatment of UK policyholders in insolvency and winding up, as well as expectations regarding availability of assets in winding up.
4. Pure reinsurance branches – the PRA has confirmed that it does not require pure reinsurance branches to hold assets in the UK to cover the solvency capital requirement (SCR), nor to hold assets on deposit as security. The PRA has also highlighted that in the interim period before implementation of the new Solvency UK rules on 31 December 2024 (which set out fewer reporting requirements for pure reinsurance branches), it offers a Modification by Consent for pure reinsurance branches which waives rules relating to branch capital requirements and some other reporting.
5. Financial Services Compensation Scheme (FSCS) subsidiarisation threshold – the PRA has outlined its approach to assessing the scale of UK branch activity covered by the FSCS, including its expectation for third-country branches to have under £500 million of insurance liabilities covered by the FSCS.
6. Waivers and Modifications by Consent – the PRA has reiterated that waiver applications can be submitted for any PRA reporting requirements, including those proposed under its Solvency UK reforms.
7. Re-domiciliation – the PRA has set out its proposed approach to re-domiciliation, outlining its expectations in cases where a third-country branch undertaking that is authorised to operate as a third-country branch re-domiciles to another home jurisdiction.
8. Size of the branch vs legal entity – the PRA has confirmed that it considers the relative size of the UK branch’s operations (e.g. total premiums and liabilities) as a proportion of the operations of the whole third-country branch undertaking to be an important factor in assessing the super visability of the third-country branch.
9. Equivalence of home state supervision and supervisory cooperation – the PRA will only authorise third-country branches from “broadly equivalent” jurisdictions, which the PRA has confirmed is different from the concept of Solvency II equivalence. The PRA outlines in Chapter 2 of the Statement of Policy the criteria it uses to assess whether there is sufficient supervisory cooperation with the home supervisor, by setting out the high-level outcomes the PRA would expect to see, as well as its approach to memoranda of understanding and split of responsibilities agreements. However, the PRA has clarified that a signed memorandum of understanding does not necessarily translate to a jurisdiction being considered as broadly equivalent. The PRA will not publish the results of its equivalence assessments.

Implementation timetable

The PRA has confirmed that the new policy (including the current updated version of SS 44/15) came into force on 23 May 2024. The implementation date of the future version of SS 44/15 is 31 December 2024.