Julian Adams, director of the Financial Services Authority's (FSA) insurance division and soon to be in role at the Prudential Regulation Authority (PRA), has moved to address concerns that the new regulator would be overseeing the banking and insurance industries without understanding the differences between the two.
In a speech entitled, Is the insurance industry safe in the PRA's hands?, he told an audience at Lloyd's that he hoped updates from the Bank of England and the FSA throughout the year had addressed concerns that a subsidiary of the Bank "might somehow fail to appreciate that insurance companies and banks are different."
He continued: "And indeed in many respects general insurance and life insurance are as fundamentally different from each other as both are from banks. These differences need to be reflected in the way in which such firms are supervised."
Mr Adams informed the audience that in preparation for the move to the PRA there had been significant organisational changes.
"We have abandoned our practice where size was the primary driver of whether a firm was supervised within the FSA and decided instead to group our supervisory activity by function. We now have a dedicated insurance division which will be the centre of insurance expertise within the PRA prospectively," he said.
Philosophy
According to Mr Adams, the PRA's philosophy will be that firms will be subject to the general discipline of the market.
"The role of the regulator being in the main to address residual market failures," he explained. "In addressing market failures we will look to secure an appropriate degree of policyholder protection and to minimise the wider impact of a firm's failure.
"What we won't be in the business of doing is bringing about a position where there never can be market failure."
He noted that the potential impact of the failure of an insurer on its policyholders and the wider economy was different to that of a bank failing and said the prospective organisation was still considering what the credible recovery and resolution arrangements should look like for insurers that were failing or had failed.
He also took the opportunity to praise the use of section 166 reports which he said had been on the increase over the past few years and were now much more widespread in the insurance sector.
"We ... have found these reports particularly valuable since they give us independent validation of issues within firms and often verification that the promised remedial action has both been taken and effective.
"In the main the vast majority of firms that have been through the 166 process have found the output to be useful and instructive in bringing about changes within their own organisation," he claimed.
Lloyd's
When questioned on the forthcoming relationship with Lloyd's he was quick to stress that dialogue was ongoing and clarified: "Whatever arrangement we come to with Lloyd's will only exist because we allow it to exist."
He added: "We will remain responsible for the prudential safe and soundness regulation of those entities that make up the Lloyd's market."
