Prudential Regulation Authority Rulebook

1.1

This statement of policy (SoP) expands upon the approach set out in ‘The Prudential Regulation Authority’s (PRA) approach to insurance supervision’^[1]  (‘the approach document’) and should be read alongside the PRA’s supervisory statement (SS) 44/15 – Solvency II: third-country insurance and pure reinsurance branches.^[2] 

1.2

This SoP outlines the PRA’s approach to the authorisation and supervision of third-country insurance branches, including the PRA’s approach to determining when a subsidiary would be more appropriate than a branch. Third-country insurance branches are branches of undertakings that have permission to effect contracts of insurance in the UK but are not headquartered in the UK or Gibraltar. These foreign insurance undertakings that have a UK branch are herein referred to as ‘third-country branch undertakings’, aligning with the definition in the PRA Rulebook.

1.3

This SoP is relevant to all third-country insurance branches, as well as to any insurance undertaking not headquartered in the UK or Gibraltar looking to operate in the UK in the future. This SoP does not apply to Swiss General Insurers, as defined in the PRA Rulebook, to which different requirements apply pursuant to the Swiss Treaty Agreement (No. 91/370/EEC).

1.4

The UK has a significant presence of third-country insurers that have established operations in the UK to take advantage of insurance expertise, proximity of fellow insurers, and the UK’s strong legal and regulatory systems. Many international firms or groups operating in the UK are significant providers of financial services to the UK economy.

1.5

The PRA is open to international participation in the UK insurance market and engages actively in international policy making and supervisory co-operation. Where the Threshold Conditions are met, and where the authorisation of an international insurer is consistent with the PRA’s general objective (to promote the safety and soundness of the firms it regulates) and its insurance objective (to secure an appropriate degree of protection for insurance policyholders) on an ongoing basis, the PRA is open to the activity of international insurers operating in the UK and recognises the benefits that these international insurers can bring to the UK. It is the PRA’s view that, subject to certain safeguards, the ability of financial services firms to branch into other countries is an important component of an open world economy, which in turn benefits the UK economy and furthers the PRA’s secondary competitiveness and growth objective (SCGO) to facilitate the international competitiveness of the economy of the UK.

1.6

Openness must be accompanied by financial and operational resilience to support sustainable economic growth and the PRA’s objectives. The PRA terms this ‘responsible openness’. The PRA’s approach to ‘responsible openness’ has been informed, in part, by the supervisory lessons learned in the process of reviewing 118 branch authorisation applications received by the PRA during the Temporary Permissions Regime (TPR), and the transition from EU Passporting to a post-EU withdrawal third-country branch regime.

1.7

If authorised to do so, insurers headquartered outside the UK can operate in the UK either through a branch or by forming a subsidiary through direct PRA authorisation. A subsidiary is a separate legal entity from its parent and, as such, must meet regulatory capital requirements with its own funds, and have its own governance and risk management. A branch forms part of a third-country branch undertaking headquartered abroad.

1.8

The PRA’s approach to the authorisation and supervision of third-country branches is anchored in its statutory objectives. The principles of this approach are set out in further detail in Section 2 and are underpinned by the PRA’s assessment of regulatory equivalence and ‘supervisability’, which is the PRA’s ability to effectively supervise an insurer that seeks to operate in the UK through a branch. Third-country branch undertakings operating in the UK are subject to the PRA’s rules which are relevant to third-country branches and third-country branch undertakings, as set out in the PRA Rulebook. Additional background is set out in the approach document and SS44/15 – Solvency II: third-country insurance and pure reinsurance branches.^[3]

1.9

As a branch forms part of a third-country branch undertaking headquartered abroad, the PRA requires that the third-country branch undertaking as a whole has adequate financial resources. This is in contrast with the financial resources requirements for a subsidiary and reflects the PRA’s view that the third-country branch’s operations are necessarily dependent on those of the third-country branch undertaking.

1.10

Supervisory powers reflect the differences in how a firm is structured. Insurance subsidiaries are subject to the PRA’s insurance supervision regime for UK-based insurers. In contrast, responsibilities for the supervision of third-country branches are split between the supervisor where the third-country branch undertaking is headquartered (the home supervisor) and the PRA (the host supervisor). The PRA focuses on maintaining strong, cooperative working relationships with home supervisors in other jurisdictions, bilaterally and through supervisory colleges.

1.11

In promoting its statutory objectives of safety and soundness and policyholder protection, the PRA focuses principally on the harm that firms can cause to the stability of the UK financial system. Aspects of both life and non-life insurance can be deemed critical to ensuring a stable financial system.

1.12

In fulfilling its primary objectives, the PRA also considers risks to the protection of policyholders and to firm safety and soundness. This includes a consideration of the liabilities of a firm that are protected by the Financial Services Compensation Scheme (FSCS), as this can be an indicator of the impact of firm failure on both policyholders and FSCS levy payers. As a result, the PRA has different expectations for insurers that underwrite liabilities which are backed by the FSCS. Above certain thresholds, the PRA will consider authorising firms as subsidiaries in the UK rather than permitting them to operate through a UK branch, thereby allowing the PRA to exercise greater supervisory oversight of the whole firm and its risks.

1.13

The PRA will also apply greater regulatory scrutiny to certain arrangements of third-country branches that have liabilities that are backed by the FSCS, including outwards reinsurance arrangements.

1.14

The Financial Conduct Authority (FCA) is the conduct regulator for all insurers operating in the UK. Third-country branches are subject to the FCA’s rules: these are not affected by this SoP.