The PRA is monitoring trends in firms’ modelled SCRs. We are especially vigilant about SCR changes that cannot be adequately justified.
Some firms analyse their own data for possible model drift. We encourage other firms to look at this too.
This post has been prepared with the help of Guy Brett-Robertson, Paul Collins, Amanda Istari, Ryan Li, Dimitris Papachristou, Chintan Patel and Jiaqi Tan.
This analysis was presented to the Prudential Regulation Committee in December 2019.
This analysis was carried out prior to Covid-19. The full impact of Covid-19 on the insurance sector is yet to emerge. The effect of market turbulence observed over the first half of 2020 as well as insurance claims, on the firms’ internal models, is likely to come through over the coming months.
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1. The structural changes to firms’ balance sheets and changes in firms’ risk profiles could be due to:
(a) restructures and transfers of insurance business, some of which were driven by Brexit;
(b) insurers implementing risk mitigation actions, such as buying reinsurance;
(c) life insurers increasing their holdings of restructured illiquid assets which attract a much higher capital charge under the standard formula;
(d) life insurers expanding in the unit-linked market, which has relatively low capital requirements; or
(e) general insurers reducing or completely cutting unprofitable sections of their books.