Paper outlines how future solvency regulator will supervise insurance in the United Kingdom

The Bank of England and the Financial Services Authority (FSA) have published a joint paper, The Bank of England, Prudential Regulation Authority – Our approach to insurance supervision, outlining the current thinking on how the future Prudential Regulation Authority (PRA) will approach the supervision of insurers.
It is expected the PRA will be created as a subsidiary of the Bank of England by the end of 2012. It will be responsible for the prudential supervision of more than 2,000 firms, of which around half will be insurers, with the remainder deposit-takers and certain investment firms.
Its role will be distinct from that of the future Financial Conduct Authority (FCA), which will regulate conduct.
The PRA will supervise companies specializing in life insurance, general insurance and wholesale insurance (including reinsurance) and companies that undertake a composite of these activities.
On current data, it will regulate 636 general insurers, around 300 of which operate in the United Kingdom under a passport from other EEA countries, 123 life insurers (of which 70 will be EEA authorized), 133 friendly societies and around 132 insurers involved in the London Market.
The published paper recognizes that insurers do present different solvency risks than banks.
“In general, firms carrying out traditional insurance activities do not pose risk to the system in the same way as banks,” the paper says. “They do not typically undertake maturity transformation and the nature of their liabilities means they are considerably less vulnerable to sudden losses of confidence.
“Nor, on the whole, do they become leveraged to the same extent as banks.
“In addition, with the exception of reinsurers, insurers’ interconnectedness is very considerably less than that of banks.”
At the same time, insurers, particularly those combined with banks in a single group, can cause systemic instability when they fail, the paper notes. And more generally, insurers do provide significant funding to the banks.
The full paper can be accessed at:
http://www.fsa.gov.uk/pubs/other/pra_insurance.pdf