PRA sounds warning on reserve inadequacy
The risk of reserving deficiencies may be increasing in some lines of business, particularly in specialty classes, the Bank of England Prudential Regulation Authority has warned CEOs of general insurance firms.
An additional letter sent to chief actuaries also highlights specific areas of concern relating to individual case reserve adequacy, future claims inflation and attritional loss deterioration on older years of business.
The PRA said it has heard some anecdotal concern that commercial pressure from management to deliver improved results may sometimes translate into actuarial judgements being challenged disproportionately where there may be areas of potential prudence, with less focus on areas where there may be potential reserve inadequacy.
“Where relevant, we will expect management and boards to be especially vigilant on these issues as they consider the appropriateness of their reserves and solvency positions as we approach the year end,” it said in its letter to CEOs.
The PRA’s letter also said that reserve deterioration over recent years raises concerns about ongoing optimism within firms’ reserving and business planning assumptions, and where firms may be taking credit too quickly for underwriting remediation activity.
It also noted that there are underdeveloped links between internal business and control functions with the result that key underwriting, claims and reserving trends may not be being picked up and acted upon quickly.
It added that there is insufficient management information and transparency at board level about the key judgements being made when setting reserves, to help boards understand and challenge where reserves are being set within a reasonable range; and that weaknesses in underlying data quality are limiting firms’ ability to identify and act on trends relating to underwriting performance, reserving and exposure management.
“Given this backdrop, you can expect reserving to be an important area of supervisory focus for us in the months ahead, particularly for firms with material exposures to longer‐tail casualty lines, firms who show a poor track record of reserving developments compared with initial assumptions, and those who have shown rapid growth,” it said.
