The Cloud Has a Silver Lining for Insurers - Just Watch Out for Showers

A couple of weeks ago, the PRA and the FCA issued two documents which must have resulted in collective sighs of relief within insurance companies and Lloyd’s syndicates. They deal with the subject I’ve covered in blog posts during both October and November; that of the proposed new senior managers regime for insurers. I apologise for coming back to this, but now that the regulators have brought their proposals out into the open, I felt it was right not to leave this issue hanging.

It doesn’t start too well

Both regulators start their consultations by stating the primary driver for the change – Solvency II. This requires that regulators in EU Member States have sufficiently robust procedures in place for the checking of the fitness and propriety of those holding key functions within insurers. The other driver is a desire to incorporate as many features as possible from the proposed senior managers regime for banks, into the insurance regulatory model. So, that doesn’t bode too well.

But it gets better 

As you read through the documents, it becomes clear that in practice, a number of the features of the proposed banking regime are conspicuous by their absence. Most notably;

  • The reverse burden of proof that will be introduced in banks, will not apply to insurance senior managers.
  • The certification regime, proposed in banks for those individuals who are not senior managers, but pose a significant risk to the firm through their actions, is also not present.
  • The conduct rules, designed to replace the statements of principle for approved persons, will only apply to those holding key functions. Not, as proposed for the banks, for all staff barring those carrying out ancillary functions.

So at this point, it’s likely that many senior individuals in insurers could feel a sense of relief. There’s no doubt that the requirements are far less onerous than they are for banks.

There’s still work to do

This doesn’t mean, however, that there’s no change for insurers to assimilate. Firstly, firms need to understand that the FCA and the PRA are taking somewhat different directions with regard to how they approve and supervise those in key positions. Firstly, the PRA has said that it will effectively pre-approve those holding the following four key functions: Chief Executive, Chief Finance Officer, Chief Risk Officer and Head of Internal Audit. These positions will be classed as Senior Insurance Manager Functions (SIMFs). In addition, approval will be required for those holding the roles of Chief Actuary, With-Profits Actuary and Chief Underwriting Officer, where those roles are applicable to the firm.

Whilst all this is going on, the FCA is effectively retaining the same Significant Influence Functions that it has now.

All of which could cause confusion

The PRA stated in its last consultation on Solvency II, that it wanted to align the regime for senior managers in banks and insurers as closely as possible, to make it easier to deal with for those firms with multiple business lines. But all that’s happened in practice is that insurers will have to run dual models in future. On the one hand, they need provisions for dealing with the pre-approval of individuals who occupy one of the SIMFs required by the PRA; on the other, they have to deal with a different regime for the FCA.

And it gets more complicated for banks that have insurance arms. For their core banking business, the senior managers regime applies across both the FCA and the PRA, but the regime will be different for the insurance companies held within their groups. The CEO of that company will need to be approved as a SIMF1 by the PRA and as CF3 by the FCA. And what if one person holds a senior management role for both the bank and its insurance company? Then that person needs to understand that they are a Senior Manager with both PRA and FCA for their banking responsibilities, but it’s different for their role within the insurer. How will they understand that for part of their activities, they are subject to the reverse burden of proof, but that this doesn’t apply in relation to their insurance responsibilities? I don’t envy the compliance teams who have to try and explain that one!

This is where training comes in

Just because the requirements are less onerous for insurers than they are for banks, it doesn’t mean that firms can take their foot off the throttle when it comes to making the right training arrangements. There’s a lot of information to take in here, and no doubt board members and senior managers will be anxious to know what their responsibilities will be under the new regime. The fact that there are two different approaches to governing senior managers will also cause a great deal of concern. It will be a major challenge to cut through this so that those affected fully understand and are comfortable with what will be expected of them.

The new regime will also be a point of concern for non-executive directors too. More so, because the details of how this will apply across the industry have yet to be decided, and will be subject to a separate consultation early next year.

A co-ordinated solution

The major challenge for firms is how to structure their training the best way. Yes, some of this can be developed in-house, but firms could find they are better served by a combination of in-house delivery and external assistance. Perhaps by a co-ordinated programme of seminar attendance. Alternatively, it may be a good idea to send key individuals to relevant conferences. There’s also the option of arranging a bespoke package delivered by a specialist provider.

Details of these options and more are not always that easy to find. But they are if you start your search with Industry Events Online.


Martyn Oughton    

By Martyn Oughton a Professional Member of the International Compliance Association (ICA).  Martyn now writes a regular blog for Industry Events Online focusing on the importance of training in all aspects of compliance. Read Martyn's other publications at Martyn's Writers' Residence website.

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