13 March 2013News

FSA ramps up scrutiny of re/insurers

The UK Financial Services Authority has turned its attentions to the insurance industry, with the number of intensive on-site ARROW visits rising markedly in 2012, with close scrutiny continuing this year.

ARROW—or Advanced Risk Response Operating Framework—visits involving the insurance industry rose by 38 percent in 2012 according to law firm, Reynolds Porter Chamberlain (RPC), which found that the Financial Services Authority’s attention has shifted from the banking sector to the re/insurance industry.

RPC described ARROW visits as “in depth regulatory probes of individual businesses where the FSA demands a significant amount of documentation to assess risk handling and then conducts on-site interviews with senior management and other staff. The insurance sector finds these visits very expensive because of paperwork and management time spent in dealing with them.”

It seems that the insurance industry has once more been caught in the regulatory dragnet thrown up by regulators following the crisis that befell the banks post-2008.

Bermuda:Re spoke with one of the author’s of RPC’s report, Richard Burger, a partner at the law firm about the implications of increased scrutiny for the re/insurance sector.

How significant is the increase in scrutiny of the insurance industry from the FSA? What is driving this interest?

Since 2008 the regulator's eye has been firmly on banks. As we hopefully move to a period of regulatory stability for the banking sector, it is not surprising that the FSA is looking at other major sectors, including insurance.  This does not mean that insurance is being specifically targeted, but it plays a significant part in the UK financial services economy and the UK's financial services’ reputation and brand.

What are the implications of ARROWs for re/insurers? Has the FSA indicated there are particular areas of concern?

More time and expense to attend to ARROW preparation and any follow-on action points.  There are no significant areas of concern; rather there are areas of interest that include reserving and corporate governance.

Does the remit of ARROWs include UK subsidiaries of non-UK domiciled firms and the overseas subsidiaries of UK-domiciled firms?

Only FSA-authorised and regulated entities will face ARROW scrutiny, but I have seen the FSA squeeze questions in about other businesses within the group if the FSA believes that these exercise some control over an FSA-regulated firm.

What can firms expect from the process?

More time and cost.

Do you think other international regulators will follow the FSA’s lead on this?

Not the major regulators in the US or established European Economic Area member states, but for emerging markets who follow the FSA model, they may wish to adopt some of the ARROW model processes.

Considering the already ongoing Solvency II project and the performance of the industry in the face of the financial crisis, is the FSA’s increased interest in the re/insurance sector likely to be seen as excessive?

Not excessive, but you can understand the pressures on the risk and compliance function of an insurer if it has been engaging with regulators on Solvency II and then has an ARROW or on-site risk assessment from the new regulators to prepare for and action. I suspect that the function would prefer to be engaging with the business rather than with the regulator.