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PRA warns on ‘over-optimistic’ views on pricing

June 30, 2017

The Prudential Regulation Authority (PRA) has warned that some carriers may be taking an “overly optimistic” view of current pricing, as well as highlighting carriers’ concerns surrounding facilities.

In a 22 June letter to insurance CEOs following the regulator's latest ‘monitoring-the-market’ questionnaire, PRA executive director of insurance supervision David Rule noted that although the survey findings pointed to another year of continued price softening and some evidence of widening terms and conditions carriers", estimates of overall premium adequacy were “marginally higher”.

While we recognise that not all business can be subject to robust technical price, this observation does raise the question whether some firms are taking an overly optimistic view of current pricing,” he said.

Rule said that given the findings of the review, the PRA was concerned that some firms may have insufficiently captured current market conditions and the potential impact of broadening terms and conditions in their risk management.

He noted that examples of widening terms and conditions included extending business interruption coverage to incorporate non-damage perils, cyber inclusions, expansions of cover to feature non-physical damage, and an increase in multi-year policies.

It is important that firms are transparent on the extent and level to which changes in terms and conditions carry an internal cost (for instance an increase in risk capital or an increase in the level of IBNR held), and whether this cost is commensurate with the additional risks,” he continued.

Rule said that the PRA will carry out a number of supervisory initiatives to improve

Its understanding of how individual firms are being affected by current market conditions, including a detailed assessment of underwriting and exposure management at several large corporate insurers for selected lines of business.

Meanwhile, the PRA also said that it is looking at the impact of business written by the firms participating in broker facilities, MGAs and other delegated underwriting arrangements.

“We will be assessing how they ensure that they understand the impact of business written on their overall risk profile and their results", Rule wrote.

This comes as many survey respondents expressed concerns about “changing distribution channels”, with common themes including higher commissions, difficulties in exposure management and the implications of moving from case to portfolio pricing.

"Views differed as to whether broker-insurer facilities were significantly increasing acquisition costs. Some firms stated that increased commissions could be offset by a reduction in their own claims administration," said Rule.

"However, a common point of feedback was the importance of managing the potential for conflicts of interest and transparency of commission arrangements. Several firms mentioned increases in different types of commission and fee arrangements that could be perceived as going against the benefit of the insured,” he continued.