Supervisory Statement SS2/18 International insurers: the Prudential Regulation Authority s approach to branch authorisation and supervision

Transcription

1 Supervisry Statement SS2/18 Internatinal insurers: the Prudential Regulatin Authrity s apprach t branch authrisatin and supervisin March 2018

2 Prudential Regulatin Authrity 20 Mrgate Lndn EC2R 6DA

3 Supervisry Statement SS2/18 Internatinal insurers: the Prudential Regulatin Authrity s apprach t branch authrisatin and supervisin March 2018 Bank f England 2018

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5 Cntents 1 2 Intrductin 5 Assessing risks f a third-cuntry branch in the United Kingdm 6

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7 Internatinal insurers: the PRA s apprach t branch authrisatin and supervisin March Intrductin 1.1 This supervisry statement adds t The Prudential Regulatin Authrity s (PRA s) apprach t insurance supervisin 1 ( the apprach dcument ) and supplements Supervisry Statement (SS) 44/15 Slvency II: third-cuntry insurance and pure reinsurance branches. 2 It clarifies hw the PRA will authrise and supervise third-cuntry insurance branches. Thirdcuntry insurance branches are branches f insurers perating, but nt headquartered, in the United Kingdm that are nt able t benefit frm passprting rights. In particular, this statement sets ut the PRA s expectatins n when a subsidiary wuld be mre apprpriate than a branch fr a third-cuntry insurer wishing t carry ut insurance business in the United Kingdm. 1.2 This supervisry statement is relevant t all third-cuntry insurance branches, as well as t any insurer nt headquartered in the United Kingdm lking t perate in the United Kingdm in the future. This statement des nt apply t Swiss General Insurers, as defined in the PRA Rulebk, t which different requirements apply pursuant t the Swiss Treaty Agreement (N. 91/370/EEC). 1.3 Setting ut the PRA s prpsed apprach t branch supervisin in a supervisry statement helps all firms t understand the PRA s expectatins, and s uses the resurces f the PRA efficiently. In additin, the benefits set ut at cnsultatin 3 advance the PRA s bjectives f prmting safety and sundness, and plicyhlder prtectin f PRA authrised firms, in rder t prtect and enhance the stability f the financial system f the United Kingdm. Backgrund 1.4 The apprach t the supervisin f insurers that perate in the United Kingdm was set ut in the apprach dcument and further clarified in SS44/15. In the apprach dcument, the PRA explains hw its supervisry apprach is anchred in its bjectives t prmte the safety and sundness f firms, and cntribute t securing an apprpriate degree f prtectin fr plicyhlders. Insurers in the United Kingdm 1.5 If authrised t d s, insurers headquartered utside f the United Kingdm can perate in the United Kingdm either thrugh a branch r by frming a subsidiary. This can either be thrugh direct PRA authrisatin r, in sme circumstances, thrugh passprting rights. A subsidiary is a separate legal entity frm its parent and, as such, must meet regulatry capital requirements with its wn funds and have its wn gvernance and risk management. A branch frms part f a legal entity headquartered abrad. 1.6 Third-cuntry insurers perating thrugh a branch in the United Kingdm are subject t the PRA s rules n third-cuntry branches as set ut in the PRA Rulebk with additinal backgrund in the apprach dcument and SS44/15. Fr example, such branches need t have sufficient assets attributed t their branch business t meet branch liabilities and t have a lcal branch manager. The PRA als requires that the legal entity as a whle has sufficient financial resurces. Supervisry pwers reflect the differences in hw a firm is structured. Insurance subsidiaries are subject t the PRA s sl insurance regime. In cntrast, 1 March 2016: 2 Nvember 2015: 3 Cnsultatin Paper 30/17 Internatinal insurers: the Prudential Regulatin Authrity s apprach t branch authrisatin and supervisin, December 2017, available n page 2 at:

8 6 Internatinal insurers: the PRA s apprach t branch authrisatin and supervisin March 2018 respnsibilities fr the prudential supervisin f branches are split between the supervisr where the insurer is headquartered (the hme supervisr) and the PRA (the hst supervisr). 1.7 In prmting its statutry bjectives f safety and sundness and plicyhlder prtectin, the PRA fcuses principally n the harm that firms can cause t the stability f the UK financial system. Aspects f bth life and nn-life insurance can be deemed critical t ensuring a stable financial system. The PRA s view is that, subject t certain safeguards, the ability f financial services firms t branch int ther cuntries is an imprtant cmpnent f an pen wrld ecnmy which in turn benefits the UK ecnmy. 1.8 The Financial Cnduct Authrity (FCA) is the cnduct regulatr fr all insurers perating in the United Kingdm. All branches are subject t the FCA s rules: these are nt affected by this supervisry statement. 2 Assessing risks f a third-cuntry branch in the United Kingdm 2.1 When cnsidering applicatins frm a firm fr authrisatin as a third-cuntry branch, the PRA s apprach is anchred in its statutry bjectives and includes an assessment f regulatry equivalence and the PRA s ability t supervise an insurer that seeks t perate in the United Kingdm thrugh a branch. The PRA cnsiders, and needs t be satisfied that: the hme jurisdictin s prudential supervisin regime is bradly equivalent in an assessment f equivalence by the PRA including assessment f the hme jurisdictin s (this is nt an exhaustive list): regulatry framewrk; pwers; supervisin f individual firms and the cnslidated grup; infrmatin sharing; cnfidentiality; and cmpetence and independence f supervisin. (Such an assessment is likely t be linked t, but nt necessarily the same as, frmal determinatins f equivalence in respect f Slvency II.) the firm is capable f being supervised effectively by the hme supervisr; the whle firm is able t meet the Threshld Cnditins; there is sufficient supervisry cperatin with the hme supervisr; UK plicyhlders f the firm will be given the apprpriate pririty in an inslvency and that there is n discriminatin against plicyhlders whse business is written in the United Kingdm in the event f a winding up;

9 Internatinal insurers: the PRA s apprach t branch authrisatin and supervisin March the firm is able t meet relevant PRA rules, including the Senir Insurance Managers Regime and, n its implementatin, the full Senir Managers and Certificatin Regime 1 applicable t the relevant individuals respnsible fr the branch; given the scale f UK branch activity cvered by the Financial Services Cmpensatin Scheme (FSCS), the prtected amunt cvered by the FSCS can be absrbed by insurers liable t cntribute t the FSCS; and the impact f the failure f a firm with a UK branch n the wider UK insurance market and financial system wuld nt lead t brader instability. 2.2 The PRA s apprach t brad equivalence f a hme supervisr, plicyhlder discriminatin and relevant PRA regulatin has been published in SS44/15 and the PRA s apprach dcument. The final tw factrs abve, which will be cnsidered in parallel t the thers when reviewing an applicatin fr third-cuntry branch authrisatin r when cnsidering the apprpriate future structure fr an existing third-cuntry branch peratin, are explained further belw. 2.3 The PRA assesses these cnsideratins in their ttality, but emphasises the verall supervisability f an insurer that perates in the United Kingdm thrugh a branch. In particular, the PRA will place cnsiderable weight n assessing the extent and quality f cperatin with the hme supervisr. In perfrming the assessment, the PRA will balance the verall supervisability against the nature and scale f the insurance activities that the firm prpses t carry ut, including thse thrugh its UK branch. The scale f United Kingdm branch activity cvered by the FSCS 2.4 Eligible plicyhlders f insurers perating in the United Kingdm which are authrised by the PRA are cvered by the FSCS. Therefre, regardless f whether third-cuntry insurers perating in the United Kingdm d s thrugh branches r subsidiaries, the ptential cst t the FSCS f an insurer default wuld be the same. 2.5 The level f FSCS-prtected liabilities is a strng indicatr f the impact f failure f a branch t bth plicyhlders and FSCS levy payers. 2.6 Levies n insurers writing FSCS-prtected business are used t cver the csts f cmpensatin. The size f these levies is limited t prevent insurers becming unprfitable as a result f their FSCS levy bligatins. The FSCS has a brrwing prtcl in place with HM Treasury fr access t the Natinal Lans Fund fr funding requirements in excess f these annual limits. Given this, the PRA expects a greater level f supervisry versight fr these firms and the PRA has a greater ability t mitigate risks in subsidiaries as it has access t a wider range f supervisry tls and legal pwers. While nt a hard threshld, the PRA expects third-cuntry branches t have under 500 millin f insurance liabilities cvered by the FSCS when perating as a branch and may cnsider authrisatin as a subsidiary as an alternative where this is nt the case. 2.7 In referring t FSCS-prtected liabilities, the PRA means an estimate f the aggregate grss amunt f liabilities calculated by reference t prtected cntracts f insurance with eligible claimants. This is calculated befre the applicatin f any limits n the cmpensatin that wuld be paid by the FSCS (fr example where the limit f cver is 90% f the claim fr 1 HM Treasury has annunced that the extensin f the SM&CR t insurers will cmmence n 10 December 2018:

10 8 Internatinal insurers: the PRA s apprach t branch authrisatin and supervisin March 2018 certain prtected cntracts f insurance). The grss amunt f such prtected liabilities excludes any recvery that the FSCS might make frm the estate f the insurer which is in default. It is als independent f the assets f the estate, including any recveries which the insurer may be able t make under cntracts f reinsurance. 2.8 The PRA will take int accunt the medium-term strategy, business plan and frecasts f the branch business in assessing the FSCS-prtected liabilities threshld. Fr example, the PRA may decide t allw a firm t perate thrugh a branch if FSCS-prtected liabilities are likely t fall belw the threshld in the near future. Cnversely, the PRA may expect a firm t begin preparatins t perate thrugh a UK subsidiary where its FSCS-prtected liabilities are currently belw the threshld but the firm is prjecting that they will grw abve it in the near future. 2.9 The PRA is aware that the prcess f cnverting frm a branch t a subsidiary requires planning and preparatin, and will cnsider with firms a reasnable time perid t restructure, where apprpriate, taking int accunt the peratinal steps invlved and the risks t the PRA s bjectives. The impact f a branch failure n the wider insurance market and financial system 2.10 If an insurer s FSCS liabilities are belw the threshld f 500 millin f FSCS liabilities, it culd still, in sme cases, pse a significant risk t the financial stability f the United Kingdm. The PRA will cnsider ther relevant factrs when reviewing the ptential impact f a thirdcuntry branch n financial stability, including the: availability f substitute prducts that wuld ffer a plicyhlder a similar level f prtectin; branch s psitin in the UK market, particularly assessing the size f the market share in a niche market; level f cnnectivity f a branch in the industry it perates within: fr example, the extent and cmplexity f inter-firm transactins; and significance f the UK peratins f the third-cuntry branch cmpared t the amunt f business within ther jurisdictins.