PRA reviews insurer third-party concentration risks

KPMG has today published analysis of the Prudential Regulation Authority’s Insurance supervision 2023 priorities letter, highlighting a renewed focus on counterparty and concentration risks linked to reinsurance and third‑party arrangements. The KPMG report notes that the PRA will scrutinise how rapidly growing reinsurance use and outsourced services could create concentrated exposures across individual insurers and the wider sector.

Key findings from the KPMG and other consultant briefings on the PRA’s 2023 priorities include:

• The PRA’s priorities letter, issued on 10 January 2023, sets out supervisory expectations for insurers across financial and operational resilience, climate risk, and governance and risk management. • The PRA flags potential offshored counterparty concentration risk arising from rapidly growing levels of reinsurance, particularly where exposures are focused on a small number of counterparties. • The PRA expects UK authorised firms to consider and comply with the Prudent Person Principle in relation to risks from their reinsurance activities.

• The PRA will examine whether policy action is needed on reinsurance structures and limits to mitigate systemic risks to policyholders as part of its work on counterparty and concentration risk. • The PRA highlights concentration risks in funded reinsurance used in bulk purchase annuity business, warning that specialised fully funded reinsurers may increase carriers’ overall risk profiles. • The PRA reiterates expectations on outsourcing and third‑party risk management, including that important business services must remain within impact tolerances even when relying on external providers, and that insurers should review their exposure to third parties.

KPMG reports that the PRA’s 2023 supervisory agenda continues to emphasise financial and operational resilience, alongside financial risks from climate change and governance and risk management. Within this, KPMG notes that the regulator is sharpening its focus on how reinsurance and outsourcing choices affect firms’ resilience under stress. According to the priorities letter, the PRA expects UK authorised firms to assess their compliance with the Prudent Person Principle for risks associated with their reinsurance activities, including how these arrangements affect overall risk profiles. The letter states that insurers should consider the resilience of their reinsurers over the full duration of exposures and the potential impact of a mass recapture event where large concentrations to a small number of counterparties exist.