David Rule: Managing risk in a soft market Speech by Mr David Rule, Executive Director of Insurance Supervision of the Bank of England, at the General Insurance Research Organisation conference, Dublin, 21 September 2016. *  *  *  Good morning. This is my first speech as the Bank’s Executive Director for Insurance Supervision. Since I took on this role in July, I have been trying to meet with as many chief executives and chairmen of UK insurers as possible. I have been struck by the variety of business models and strategies but one theme has dominated discussions of the risks facing insurers: the current low rate environment. For life insurers, this can create direct solvency pressures to the extent that they are not fully matched against the increasing value of their future liabilities as discount rates fall. That can also be an issue for some general insurers with long tail liabilities. More generally, low investment returns mean earnings on the “float” can no longer cushion a poor underwriting performance. The margin for error in the running of general insurance firms has reduced – firms have to underwrite profitably. On the positive side, this emphasises the importance of underwriting discipline. The soft market But of course the current soft market makes profitable underwriting more difficult to achieve. I am going to focus my remarks today on the wholesale London markets.
First, underwriting: we expect Boards to be relentlessly inquisitive in understanding and challenging the effectiveness of underwriting controls, pricing trends, exposure changes and rate adequacy in order to make informed decisions, and provide meaningful challenge, to the business. Fundamentally, the Board should seek evidence that underwriters are maintaining appropriate discipline. Second, reserving: a robust approach to the setting of reserves and appropriate and adequate oversight of the reserving process is vital. We expect Boards to demonstrate independent challenge of key issues, material uncertainties and significant assumptions in the reserves and the rationale for their choice of booked reserves. Third, reinsurance: we expect Boards to ensure that the economic impact of the reinsurance transaction is appropriately reflected in business plans, capital setting and reserving; and to be alive to the wider risks to which reinsurance placements can give rise. This includes  2  BIS central bankers’ speeches  ensuring the total risk and uncertainty over the claims run off has been captured in your risk management system and considered within your ORSA. Fourth, capital: we expect Boards to ensure that firms assessment of risk and capital requirements remain valid in this challenging trading environment. The new System of Governance requirements under Solvency II and the Senior Insurance Managers Regime are timely additions to the insurance regulatory regime, ensuring that clear expectations are being set as to the strength of systems and controls, and that there is clarity as to the roles and responsibilities of senior managers in firms.