The Bank of England’s Chris Moulder, director of general insurance at the Prudential Regulation Authority (PRA), has warned of a disconnect between the supervisory discussions had with insurance and reinsurance firms and observed market behaviour.
Speaking to a gathering of directors from the insurance and reinsurance market, Moulder said that the soft insurance and reinsurance conditions seen in the London market are; “Absent of any significant market changing event, likely to continue in much the same vein in 2016.”
He warned that premium rates are continuing to decline across the general insurance and reinsurance market, adding that “at the same time, extended terms and conditions are being accepted.”
He cautioned the industry of the dangers of a prolonged soft insurance and reinsurance market, the need to ensure robust capital levels are maintained and the need for disciplined behaviour to be followed.
Re/insurer results have been insulated, Moulder warned, “by the continued absence of significant natural catastrophe losses, and prior year reserve releases” which has protected their performance from the full impact of re/insurance market trading conditions.
But Moulder said that the Bank of England Prudential Regulation Authority (PRA) sees a disconnect, between what it is being told by insurance and reinsurance companies during meetings and the evidence from the wider re/insurance market.
One area that clearly concerns the Bank of England is the prospect that some insurers and reinsurers continue to grow in the challenging and softened market, with Moulder warning of the importance that “firms that are looking to expand in current market conditions do so in a responsible and sustainable manner and are transparent with Boards about how they intend to attract business.”
“I mention this because, as you might expect, we talk to lots of firms about market rates – and it’s always someone else who’s driving prices down!” Moulder stressed.
Going on to explain that as a regulator the Prudential Regulation Authority (PRA) has noticed this apparent disconnect, between the information received during supervisory discussions with individual firms and the observed behaviour, in the wider market.
The PRA has clearly noted some of the recent market trends, such as reinsurance firms taking on more risk, at ever lower pricing, with broader terms, or primary companies retaining more risk, while underwriting more inclusive contracts again at broader terms. Additionally the PRA is clearly aware, from Moulders speech, that re/insurer results are being augmented by reserve releases and yet returns are on a steady decline.
But at the same time everyone the PRA speaks to claims to be disciplined, in terms of underwriting and how they are navigating the soft market. This disconnect from reality will come back to bite some underwriters in the future, as it appears impossible that absolutely everyone is maintaining discipline and the PRA clearly shares this skepticism.
Moulder explained that the current soft market environment makes underwriting controls more important than ever, urging Boards to seek evidence that underwriters are maintaining discipline on pricing, risk controls and reserving.
The PRA, Moulder said, is “alive to the implications that mispricing has on prudential risk, such as reserving adequacy, and the long-term viability and sustainability of firms’ business models.”
Moulder also warned that the PRA has become aware of suggestions that “more complex reinsurance arrangements are starting to re-emerge in the market.” He said that the PRA will continue to seek evidence that reductions in capital associated with reinsurance transactions are “commensurate with real risk transfer taking place.”
His speech also warned against an over-reliance on risk models in reinsurance, saying that the PRA hears anecdotally that “there may be an increasing reliance on models to inform the purchase of reinsurance up to the 1 in 200 point.”
Moulders speech was fairly wide-ranging, covering many areas that the PRA is now watching closely for signs of discipline waning. Most telling though are his comments that the PRA is aware of a disconnect between what it is being told be re/insurers and how the market is actually conducting itself.
This is something to watch as softness continues and perhaps more so when we see a meaningful loss event. There will be differences in impact and it could be very telling as to who exactly has been less than transparent in supervisory meetings with the PRA.