Duck Creek Blog
Blog Post - EMEA

Regulation, regulation, regulation: change is coming in the UK

February 17, 2021

Nimbler insurers will navigate 2021’s uncertainties more easily, writes Mike Smart, Sales Director, Duck Creek Technologies

In December, the UK’s Prudential Regulation Authority (PRA) set out its priorities for the insurance sector in 2021. Despite this unusual step, the regulator used the familiar format of a “Dear CEO” letter to the chief executives of insurance companies to emphasise the importance of EC3’s leadership understanding its aims.

“Our overarching aim is that the insurance sector continues to be able to provide financial protection and security to its customers when they need it,” the PRA wrote. “The sector faces an unusually uncertain economic environment and a number of longer-term risks. Our focus will be on: financial resilience; credit risk; the operational impact of Covid-19; risks resulting from the end of the [Brexit] transition period; and climate change.”

In my previous blog post, I looked at the priorities of the PRA’s sister regulator, the Financial Conduct Authority (FCA), primarily focused on ensuring equitable pricing and treating customers fairly. Those consumer-centric aims look set to continue, buoyed by its recent test case win in the Supreme Court on Business Interruption claims. However, for its part, the PRA remains focused on market stability matters.

Resilience is key

The PRA’s letter underlined the need for the sector’s continued resilience as well as its socio-economic role in the post-pandemic period. What is striking is a willingness to talk in strategic terms, such as geopolitical risks, long-term demographic trends, a sustained low-interest-rate environment, changes in conduct environment, and climate change.

On climate risk – clearly a big focus for the regulator – firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021. Five UK life insurers and six UK general insurers will participate in a Climate Biennial Exploratory Scenario in June 2021.

True to the Old Lady’s origins, the PRA sees resilience primarily in credit risk terms and views the outlook as highly uncertain given the mix of macro-economic uncertainties faced, with insurers exposed to downgrade and default risks accompanying any deterioration in credit fundamentals.

Stress testing

Another sector-wide insurance stress test, for measuring sector resilience to specific shocks and to provide a top-down assessment of individual firms’ capital adequacy, is not expected until 2022. In the meantime, in 2021 the regulator has said it will develop our approach to recovery and resolution planning to avoid the risk of any disorderly failures.

On Brexit, for now, the short-term changes are technical, particularly for reporting and publication of data. The PRA is focused on assuming new functions previously carried out by the European Insurance and Occupational Pensions Authority following the EU withdrawal transition period.

The PRA acknowledges considerable uncertainty ahead, as with so many challenges in 2021. Not least, discussions remain ahead to negotiate regulatory equivalency following the end of passporting rights for insurers and financial services under the terms of Christmas Eve’s Brexit deal. “The UK insurance industry will continue to change shape, for example via a shift to specialisation and Brexit-related business transfers,” the PRA said.

Brexit, even now that the deal is done, remains subject to uncertainty. An emphasis on flexibility for change – responding to a mix of short-term uncertainties, medium-term black swans, and longer-term grey rhinos – means London market firms will want nimble operations to best position themselves.

Focus on technology that enables nimbleness

Cloud solutions are a key part of the architecture that is enabling the insurance sector to continuously adapt to a fast-changing risk and regulatory landscape. Software-as-a-service (SaaS) ecosystems are designed to adapt to constant change – providing an evergreen platform for an insurer to run its operations from is their fundamental nature. Digital ecosystems have an innate flexibility when compared to bricks, mortar, or their IT equivalents – in-house server rooms and legacy technology.

This nimbler future is being shaped at companies like Duck Creek. Our agile SaaS ecosystem is accelerating transformation and transforming customer experience. Our low-code platform automates updates, drives efficiencies, and optimises core systems, providing the freedom to launch products and enter markets faster, freeing up IT to innovate and scaling ambitions for growth. While we think 2021 provides some challenges, the solutions to steer them through are within insurers’ grasp.


Supreme Court judgment in FCA’s business interruption insurance test case | FCA

Keep up on our latest news!
Mike Smart
Mike Smart has worked in the insurance industry in both personal and commercial lines across multiple geographies for over 30 years. He has operated as a Board member for several different technology companies, as well as having run an FCA regulated insurance entity.