The Prudential Regulation Authority (PRA) has recently proposed changes to its approach for authorising and supervising third-country insurance branches operating in the UK, updating its approach to authorising and supervising insurance branches. This policy mostly consolidates existing practices but provides important clarifications.
The PRA expects that third country branch (TCB) undertakings need to establish at least the four minimum key functions in respect of the branch’s operations: risk management, compliance, internal audit and actuarial. Subsequently, the rules in Insurance ‐ Fitness and Propriety will then apply in respect of these key functions.
Who Do These Rules Apply to?
The PRA guidelines apply to TCBs of entities headquartered outside the UK or Gibraltar that wish to be authorised to operate as a branch in the UK. Swiss General Insurers are not in scope as they are subject to different requirements under the Swiss Treaty Agreement. An example would be where a foreign insurance company opens a branch in the UK (as opposed to a subsidiary limited company).
These regulations have come about as a result of the UK’s exit from the EU and the need to maximise the reliance of our financial services.
What Are the Key Areas?
The two main areas to note are.
Branch Reporting - ORSA
Branches can submit either a standalone branch Own Risk and Solvency Assessment (ORSA) or a legal entity ORSA.
Minimum requirements are outlined in paragraphs 9.3 and 9.5 of the updated SS 44/15.
For non-Solvency II jurisdictions, ORSA-equivalent reports may suffice, subject to PRA supervisor approval.
Senior Managers and Certification Regime (SM&CR) - Key Function Holders
Third-country branches must establish four key functions: risk management, compliance, internal audit, and actuarial.
Individuals responsible for these functions must be notified to the PRA for fit and proper assessment.
Clarification provided on when to apply for approval for specific roles (e.g., CFO, CRO) based on dedication to the branch.
PRA's Updated Policy on Insurance Branches: Detailed Overview
Branch Reporting - ORSA (Own Risk and Solvency Assessment)
The Prudential Regulation Authority (PRA) has introduced flexibility in ORSA submissions for insurance branches. Under the new policy, branches can choose to submit either a standalone branch ORSA focused specifically on their operations or a comprehensive legal entity ORSA that encompasses the entire organisation, including the branch. Regardless of the chosen approach, all submitted ORSAs must adhere to the minimum requirements outlined in paragraphs 9.3 and 9.5 of the updated SS 44/15. These requirements are designed to ensure that the ORSA adequately addresses the risk profile and solvency needs of the branch.
For branches originating from non-Solvency II jurisdictions, the PRA has shown willingness to accommodate different regulatory frameworks. In such cases, ORSA-equivalent reports may be accepted, subject to discussion and approval from the branch's assigned PRA supervisor. This approach allows the PRA to maintain prudential standards while acknowledging the diverse regulatory landscapes across different countries.
To streamline the process and reduce administrative burden, the PRA does not require firms to notify them about which ORSA approach they intend to use. This gives branches the freedom to choose the most appropriate method without additional paperwork. It's worth noting that SS 44/15 is scheduled for further revisions in December 2024, which will incorporate reforms from the Solvency UK initiative. These changes may potentially affect ORSA requirements, so branches should stay informed about these upcoming updates.
Senior Managers and Certification Regime (SM&CR) - Key Function Holders
The PRA's updated policy mandates that third-country branches establish four essential functions specifically for their operations: risk management, compliance, internal audit, and actuarial. This requirement ensures proper governance and risk management within the branch structure. Individuals responsible for these key functions must be notified to the PRA, who will assess their fit and proper status. This assessment applies if the individual is not directly holding a PRA Senior Management Function (SMF) or an FCA controlled function.
For roles that are solely dedicated to the branch, such as Chief Finance Officer, Chief Risk Officer, Chief Actuary, Chief Underwriting Officer, and Head of Internal Audit, the PRA expects firms to apply for approval. This ensures that key decision-makers in the branch are properly vetted and approved. However, if an individual's role is not wholly dedicated to the branch, the approval application process is different. In such cases, while PRA approval is not required, the branch must still notify the PRA of the individual's identity and provide relevant personal information as appropriate.
The policy also addresses the consideration of Group Entity Senior Manager roles. Branches are expected to assess whether individuals in key roles are carrying out the function of a Group Entity Senior Manager (SMF 7). If this is the case, they must apply for PRA approval for this function. This requirement ensures proper oversight of individuals who may have significant influence over both the branch and the wider group.
Overall, the PRA's approach to SM&CR for key function holders aims to balance robust governance with practical considerations of international business structures. It allows for flexibility based on the structure and size of the branch while maintaining necessary regulatory oversight. This nuanced approach recognises the complex nature of international insurance operations and seeks to implement effective governance without imposing undue burden on the branches.
What Do You Need to Do?
Clarified Risk Assessment Criteria the PRA is introducing a new Statement of Policy that outlines how they assess risks for third-country branches. Key factors include:
· Ability to meet Threshold Conditions
· Home jurisdiction's supervision regime equivalence
· Effective supervision by home and UK regulators
· Appropriate priority for UK policyholders in insolvency
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Implementation Timeline
The new policy, including the current version of SS 44/15, became effective on May 23, 2024. A future version of SS 44/15 will be implemented on December 31, 2024, incorporating Solvency II UK reforms.
As always, if you need assistance navigating these regulatory updates, don't hesitate to seek professional advice for the team at RRCA.
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