Insurers start moving towards the SMCR: latest developments

• United Kingdom

• Insurance and reinsurance
• Financial services

12-02-2018

The PRA has published a policy statement PS1/18 providing feedback to consultation issued in June 2017 on proposed amendments to the senior insurance managers regime (SIMR) and a proposal to strengthen governance through requiring insurers to take steps to encourage board diversity.

The aim behind the amendments is to bring the SIMR more closely into line with the senior managers regime as the PRA moves to a more integrated regime.

The SIMR originally put in place a streamlined version of the senior managers and certification regime (SMCR) but it had always been the intention to amend that regime to incorporate the other aspects of the SMCR that had not previously been included. There has been separate consultation on extending the SMCR regime to insurers. PS1/18 statement is an initial step in this process pending final PRA/FCA policy statements in summer 2018.

Background to the extension of the SMCR regime to insurers

The PRA has proposed a proportionate extension of the SMCR to insurers. This means that from 10 December 2018 the full SMCR regime will apply to:

• UK Solvency II firms
• The Society of Lloyd’s and Lloyd’s managing agents
• Third country (re)insurance branches
• Insurance special purpose vehicles (ISPVs)
• Large non-Directive firms ¹

The PRA’s latest policy statement PS1/18 applies to these firms to which the full regime will apply.

Given the difference in size and nature of the different types of insurer that will be subject to the SMCR, a streamlined application of the regime will apply to small non-Directive firms (NDFs)² , small run-off firms³ and ISPVs.

The PRA proposes to extend the SMCR to insurers through amendments to the SIMR. There will be a new Insurance – Certification Part to the Solvency II section of the PRA Rulebook along with corresponding new parts for large NDFs and small NDFs as well as amendments to existing sections of the PRA Rulebook relating to the SIMR.

In summer 2018 the PRA will publish a policy statement with final rules setting out the extension of the SMCR to insurers. The PRA’s key supervisory statement SS35/15 will also be amended again to reflect the detail of the extended regime.

Policy Statement PS1/18

The PS sets out the following changes to the SIMR:

• A new Chief Operations function (SIMF24). The PRA has clarified that SIMF24 is not intended to encompass relatively junior managers or individuals with only an incidental responsibility for aspects of technology and operations. The issue of whether a person is performing the Chief Operations function for a firm will be influenced by the nature, scale and complexity of a firm’s internal operations.
• A new prescribed responsibility for the firm’s performance of its obligations in respect of outsourced operational functions and activities. The PRA expects individuals holding this prescribed responsibility to be accountable for the firm’s overall policy and strategy in respect of outsourced operational functions and activities as well as for compliance with the outsourcing requirements for operational functions and activities. Despite requests from respondents to consultation, the PRA states that it does not consider that this prescribed responsibility can be split. This issue may be addressed through the use of statement of responsibility records (SS35/15 will be updated to reflect this).
• A new Head of Key Business Area function (SIMF6). This will apply to individuals who are responsible for the management of large business areas and divisions who do not report to a more senior SIMF6 holder. To identify a large business area/ division the PRA is applying a quantitative threshold in its final rules. The quantitative threshold will be referenced to the gross revenue income as well as to the value of either the assets or the technical provision held by the firm, that relate to the business area or division. SS35/15 clarifies the PRA’s expectations.
• Requiring that the Chair function (SIMF9) and CEO function (SIMF1) roles may not be held by a single individual at ‘large firms’; and
• Requiring that a non-executive director oversight SIMF role at a ‘large firm’ that is part of a group may not be performed by a group executive

These changes become effective on 10 December 2018. Firms should submit the forms for approval of individuals who will perform the Chief Operations function (SIMF24) or the Head of Large Business Area function (SIMF6) from this date.

Diversity at boards of insurers

The PRA will require Solvency II insurers and large NDFs to have a policy to consider a broad set of qualities and competences when recruiting board members and to have a policy promoting diversity among board members in order to promote a diverse board composition. The proposals complement existing industry initiatives. This rule becomes effective on 9 April 2018.

The PRA has noted that firms themselves are best placed to determine the details of their policy to promote diversity. Areas requiring greater representation will differ across firms.

A number of respondents to the consultation mentioned the important role of leaders within firms being responsible for promoting diversity and being accountable for it. This is an element of best practice highlighted by HM Treasury’s Women in Finance Charter. Although the SIMR does not include an explicit prescribed responsibility for promoting diversity, this can be relevant to other prescribed responsibilities such as those pertaining to culture and induction, learning and development of members of the firm’s governing body.

1. A firm where the value of its assets for all the regulated activities it carries out exceeds £25,000,000

2. A small NDF is a firm where the value of its assets for all the regulated activities it carries out is £25,000,000 or less

3. Defined as a firm with less than £25,000,000 technical provisions that no longer have permission to write or acquire new business