On 1 April 2013, the Prudential Regulation Authority (PRA) took over responsibility for the prudential regulation of insurance companies. The PRA promotes the safety and soundness of insurers and protects policyholders by ensuring continuity of cover so that valid claims are paid when they become due.
The PRA was created by the Financial Services Act (2012) and is part of the Bank of England. The Bank set out how it intended to regulate insurers in an approach document published in April 2013.
Julian Adams, Executive Director of Insurance at the Bank of England, explains how the Bank regulates insurance firms in practice.
Frequently Asked Questions on insurance regulation
How does the Bank of England regulate insurers?
The UK insurance industry is the third largest in the world and the largest in Europe. The Bank of England regulates all insurance business in the UK. That includes general insurers, who provide services like motor and home insurance, life insurers who provide pensions and annuities, and the Lloyds of London market. There are around 500 insurers operating in the UK.
The Bank of England places the greatest focus on the firms who present the greatest risks - for example those with a large number of policyholders or which offer more complex products.
What does the Bank of England know about insurance?
A third of PRA staff focus on insurance - setting the rules and ensuring that firms are following them. The Bank of England has teams with a mix of industry and regulatory experience, ranging from those who have worked for motor insurers or pension providers, to technical specialists like actuaries.
As insurance is a global business, the Bank of England works closely with the European regulator EIOPA and participates in international groups like IAIS – setting standards for insurance firms across the world.
How is insurance regulation divided between the Bank and the Financial Conduct Authority?
The focus for the Bank of England is the financial soundness of insurers - ensuring that firms can pay valid claims if and when they fall due. The focus of the Financial Conduct Authority is the fair treatment of customers.
This system is better because it allows the Bank to focus solely on the safety and soundness of insurance companies and ensuring policyholder protection. Having a separate regulator looking after the fair treatment of customers means each organisation is focused on its particular mandate.
How does the Bank's regulation of insurers differ to that of banks?
The Bank of England regulates firms according to the level of risk that they pose - looking at how much money they have, systems and controls, management and culture. The Bank understands that insurers are different to banks, both in the way that they deal with customers and the way they are organised, so they have to be supervised differently.
Insurers have a different relationship with their customers, compared to banks. Insurance firms often give cover for longer periods - especially when providing pensions or retirement incomes.
Will policyholders be better protected?
Policyholders will be better protected because the Bank of England has a specific objective to ensure an adequate degree of policyholder protection.
This means that the Bank works to ensure that long-term savings are protected. Policyholders can continue to save for the long term to provide an income in old age.
The Bank will work to ensure continuity of cover so that valid claims continue to be paid, if and when they fall due. This is particularly important as insurance cover is often needed when policyholders are at their most vulnerable.