Resilience needed now more than ever – Gerken

The UK’s insurance regulator has said the threats posed by climate and geopolitical risks have made the need to ensure the operational resilience of the industry more important than ever.

Charlotte Gerken, executive director, Insurance Supervision at the Bank of England was speaking at a seminar on regulation hosted by law firm Norton Rose Fulbright.

Picking up on some of the themes from the regulator’s letters to CEOs sent out in January Gerken said the risks the world faced made the role of insurers more important than ever and as such their resilience had to be ensured.

“We are all acutely aware of geopolitical risk at this time. And the long term impacts of the pandemic and ensuing structural economic changes are not yet known,” she explained. “Our 2022 insurance stress test is a key piece of work to assess both asset and liability exposures and firms’ oversight and risk management.

“Our mission is to secure the insurance sector’s continued ability, including in stressed conditions, to support the wider economy by providing financial protection and security to policyholders. While the mission is timeless, this year, Boards’ engagement in the four issues I have outlined is critical to the effectiveness of insurers.”

Gerken’s speech cited climate change, Environmental, Social, and Governance (ESG), Diversity and Inclusion and Operational resilience as the four key issues for the year ahead.

Climate change and ESG were linked and she explained the regulators role was “to satisfy ourselves that regulated firms are able to identify and manage the financial risks arising from climate change.

“This includes both physical and transition risks, which are underpinned by liability risk. The latter refers to the challenges that firms can face from claimants who have suffered loss from climate change,” Gerken added.

“The Climate Change Adaptation Report considers the role of capital requirements as a part of the supervisory toolkit. In 2022, we will continue to explore whether the current capital framework is fit for purpose or if there are changes required in order to capture climate risks adequately. We recently launched a call for research papers and will host a conference on the topic later in the year,” she said.  “While climate change risks are a significant component of at least the E in ESG, the Prudential Regulation Authority (PRA) does not have an explicit ESG remit. There is, however, considerable overlap in the Governance elements with our prudential supervision requirements and expectations: good governance is fundamental to effective risk management and to delivering good outcomes for policyholders. And an important aspect of Social is diversity and inclusion.”

On the issue of diversity and inclusion Gerken said the regulator’s focus is on ‘diversity of thought’, also known as ‘cognitive diversity’; and was working in ways in which it helpfully accelerate the pace of meaningful change across the sector.

“We see a clear link to our objectives: research shows evidence of correlations between diversity and inclusion and positive outcomes in risk management, good conduct, healthy working cultures, and innovation,” she explained. “The 2008 global financial crisis highlighted the risks of unhealthy cultures and groupthink, where views, actions, and decisions go unchallenged. The London Market has not been immune to misconduct issues, though I would acknowledge the work Lloyd’s is leading to encourage market players to tackle problems. We will engage with firms on the issue of diversity and inclusion through our continuous assessment process.

“This is not just a case of do as we say: the PRA and the Bank of England have plenty of room for improvement on diversity and inclusion and have committed to make changes to achieve the same positive aims for ourselves that we seek in the wider financial sector.”

Operational resilience has never been more important as the lessons of the pandemic and the new normal become ever more apparent.

“The Covid-19 pandemic has had a significant impact on both the PRA and the firms we regulate, bringing business recovery and continuity to the fore,” said Gerken. “The structural shifts accelerated by the last two years means operational resilience remains one of our priorities. There have been challenges directly attributable to the pandemic, such as mass working from home, and indirect challenges including major disruption caused by cyber-attacks and ransomware.

“Cyber risk continues to haunt all businesses and having a cyber-insurance policy does not substitute the need for a robust framework to manage cyber risk.”

She added: “The disruption caused by the pandemic has shown why it is critically important for insurance firms to understand the services they provide and invest in their resilience to protect themselves, their consumers, and the financial system from disruption. Some of the changes made to cope with the pandemic will be permanent and need to be incorporated into operational resilience planning.”

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