Prudential Regulation Authority Rulebook

8.1

If the PRA judges that a MTE may have occurred, the PRA will contact firms through its usual supervisory channels to understand their initial assessment of the likely impact on their financial position. Although firms’ initial estimates might be based largely on a high-level exposure assessment, the PRA expects firms to seek to understand as quickly as possible the extent to which the event might impact the level of their own funds or SCR.

8.2

At some point after a MTE, the PRA might consider collecting certain information from affected firms on a standardised basis through an ad hoc data request, to assist the PRA in assessing firms’ individual financial positions and to improve its ability to make decisions quickly.

8.3

As it is likely to be helpful for firms to understand in advance the information that the PRA might request in such circumstances, the Appendix to this supervisory statement includes an example of a standardised loss return template containing the information that the PRA believes it is most likely to need following a MTE. The PRA expects firms to review the template and consider the types of information that are likely to be useful to, and required by, the PRA at the time of an event, and to consider what steps can be taken in advance to improve firms’ ability to provide this information to the PRA at short notice and on request following a MTE.

8.4

The draft template has been prepared with no prior assumptions made about the nature of the possible MTE, its cause or its consequences. As a result, it is possible that the information template used in response to an actual event would be refined to ensure that the data requested was focused and relevant to the specific scenario.

8.5

As part of this data collection, UK entities that are part of a wider group might also be asked by the PRA to provide high-level narrative information on the impact of the event at group level, particularly where there are close financial or operational dependencies between the UK entity and other group companies. Such information may include, but may not be limited to, the impact of the event on: group solvency and/or liquidity; shared reinsurance arrangements (eg where the UK entity may be a beneficiary of shared ‘group’ reinsurance programmes), including any contribution to reinstatement premiums; group credit ratings; and other material intragroup connections. Such requests may be varied depending on the circumstances prevailing at the time of the event and the PRA does not intend to prescribe a template for the provision of such information. Where a global supervisory college exists, the PRA would consider using this mechanism, or bilateral discussions with relevant supervisors, to gather this information. Should this not be possible, the PRA would look to relevant UK entities to use their best endeavours to provide such information to the PRA on request.

8.6

The PRA recognises that there are a number of factors that would need to be taken into account by firms in making and interpreting initial loss estimates following a MTE, potentially affecting the accuracy of data submitted by firms to the PRA in these circumstances.^[10] The uncertainties involved in making loss estimates are likely to diminish over time, but in the initial period, the PRA recognises that after a MTE, firms might seek to use a range of techniques to come up with initial estimates, including vendor models, expert judgement and market benchmarks. Further uncertainties might be introduced if firms make adjustments to estimate likely net rather than gross losses, taking into account factors such as likely reinsurance recoveries or subrogation. Firms might differ in their ability to aggregate quickly (or in an automated fashion) exposures from different portfolios or legal entities.

8.7

Given these uncertainties, the PRA expects firms to use whatever techniques they believe are available and appropriate in the circumstances to begin to develop loss estimates or ranges at an early stage. The PRA believes it is not appropriate for it to prescribe the basis on which firms must compile and report their loss estimates. Instead, the PRA proposes to include in the standardised template a facility for firms to provide some narrative information to explain the basis on which initial estimates have been compiled. This should help identify any material inconsistencies in the way in which firms have provided the estimates, and thereby reduce the likelihood that inappropriate comparisons or conclusions are drawn from the data.

8.8

The PRA understands that in a MTE scenario there is likely to be a trade-off between the timescale in which a standard data request is made and returned, and the reliability of the data submitted. As a guide, the PRA believes that in most cases it is likely to look to issue its initial data request template within a week of the identification of a significant general insurance loss event, and request initial submissions from firms a week thereafter. However, the actual timeframes in which a request is made and the deadlines for responses will be determined by the PRA at the time, according to its assessment of what is appropriate and reasonable. To the extent possible in the circumstances, the PRA might seek to invite a sample of firms to comment at the time on the feasibility of the proposed timetable for initial data submission, and on any changes it proposes to make to the data requested.

8.9

The PRA might also ask firms to provide updated loss estimates periodically as further information on the event and its impact becomes available. This could be through updated versions of the standardised template or through more bespoke requests if appropriate. The frequency of any such further requests is likely to reflect the speed at which new information is likely to emerge, and will be considered by the PRA and discussed with firms at the time.

8.10

As claims payments start to materialise, the PRA might also ask firms to provide additional information on their liquidity position. This could include asking firms to project likely cash flow requirements to identify any potential liquidity strain arising out of the sudden and unexpected increase in claims payments. In making such projections, firms should consider potential risks to liquidity, including, but not limited to: the possibility of delays and disputes in reinsurance payments; broader market conditions (e.g. the potential for assets to be less liquid than anticipated) and/or the triggering of contractual terms and conditions (e.g. requiring the posting of collateral).