PRA provides improvement recommendations for insurance firms

The Prudential Regulation Authority (PRA) recently shared its insights from a review of firms’ reserving during 2019.

This included work on casualty lines for London Market firms, reserving in the UK motor market and a thematic review of case (outstanding claims) reserves in the retail and wholesale markets. Their conclusions have also been informed by wider supervisory interactions with firms and other stakeholders, such as Chief Actuaries and Lloyd’s of London.

Some of the PRA’s main findings are outlined below:

  • Key issues that will be under close review include bias in reserve assessment and inadequate claims inflation allowance on long-tail classes of business.
  • Deficiencies in MI when signing off reserves, prompting the call for clearer, more meaningful reporting and active monitoring of claims trends.
  • The need for adequate allowance for a number of areas – from environmental events to latency in claims experience related to opioids and sexual harassment, as well as newer classes where claims data is limited, like cyber.
  • Inconsistencies where third parties, including law firms, are responsible for setting reserves (as well as delay between notification and recording reserves).
  • Based on a thematic review of motor reserving, the need for supplemental analysis and data to address the various moving parts – including changes to the discount rate, whiplash reforms etc.

In response to the recommendations Nick Thomas, senior partner at Kennedys, says: “It is clear that the PRA is taking a robust line in what it expects from insurance when it comes to tackling the big ticket issues. In particular, given the palpable shift in public concern over the environment, it is of little surprise that the PRA has taken the opportunity to point out the role that insurance must take in building climate resilience into our systems and services. Insurers are well placed to influence their corporate insureds to put the climate crisis at the heart of their business strategies.

"Lack of management information reflects the increasing importance of financial forecasting and is one of several issues that make up the broader industry challenge in claims management. At the heart of those issues is increasing customer demand and I see every reason why such demand will continue to evolve and increase, especially with the increasing use (and expectation) of technology-based solutions. Customer retention is not only based on policy pricing and quality, but on the claims management process as experienced by the customer. The PRA’s conclusions also reinforce the important role that law firms have in providing good MI to the decision makers within their clients, to help them see the actual trends in their claims and thereby protect their business.”