PS8/24 – The PRA’s approach to the authorisation and supervision of insurance branches

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses the PRA received to consultation paper (CP) 21/23 – The PRA’s approach to the authorisation and supervision of insurance branches.

1.2 It also contains the PRA’s final policy relevant for third-country insurance branches, as follows:

• a new statement of policy (SoP) that replaces supervisory statement (SS) 2/18 – International insurers: the Prudential Regulation Authority’s approach to branch authorisation and supervision (Appendix 1);
• two versions of the updated SS44/15 - Solvency II: third-country insurance and pure reinsurance branches:

(i) the current version which solely incorporates the amendments proposed by CP21/23 and has an effective date of 23 May 2024 (Appendix 2); and

(ii) the future version which incorporates the amendments proposed by CP21/23 and changes confirmed in PS3/24 – Review of Solvency II: Reporting and disclosure phase 2 near-final that will be implemented on 31 December 2024 (Appendix 3);

• the updated SS20/16 – Solvency II: Reinsurance – counterparty credit risk (Appendix 4); and
• Deleted SS2/18 - International insurers: the Prudential Regulation Authority’s approach to branch authorisation and supervision (Appendix 5).

1.3 This PS is relevant to all third-country branch undertakings (as defined in the PRA Rulebook), except Swiss general insurers, and any insurance undertaking that is not headquartered in the UK or Gibraltar, that is seeking authorisation to operate as a branch in the UK.

Background

1.4 In CP21/23 the PRA proposed to:

• transfer most of the expectations in SS2/18 to a new SoP – The PRA’s approach to insurance branch authorisation and supervision. The new SoP would consolidate and clarify the PRA’s approach to authorising and supervising third-country branches. 
• update SS44/15 to include information on the PRA’s expectations of third-country branches in respect of several topics.

1.5 As already stated in SS2/18, the PRA is open to the activity of international insurers operating in the UK and recognises the benefits that these international insurers can bring to the UK. The PRA is committed to ensuring a level playing field among all insurers operating in the UK. Whilst the PRA’s approach to the authorisation and supervision of insurance third-country branches may differ from the approach to UK domiciled insurers in some aspects, the PRA’s approach to all insurers is proportionately based on their potential impact on safety and soundness and policyholder protection.

1.6 In determining its policy, the PRA considers representations received in response to consultation, publishing an account of them and the PRA’s response (‘feedback’). In this PS, the ‘Summary of responses’ chapter contains a general account of the representations made in response to the CP and the ‘Feedback to responses’ chapter contains the PRA’s feedback.

1.7 In carrying out its policy making functions, the PRA is required to have regard to various matters. In CP21/23, the PRA explained how it had regard to the most relevant of these matters in relation to the proposed policy. The ‘Changes to draft policy’ section of this chapter refers to that explanation, taking into account consultation responses where relevant.

Summary of responses

1.8 The PRA received 10 responses to CP21/23. Out of the 10 received responses, 9 respondents did not consent to the PRA publishing their names, whilst one respondent did (please see Appendix 6).

1.9 Respondents generally welcomed the PRA’s proposals to consolidate and clarify its existing approach to insurance branches, commenting that this will increase regulatory transparency.

1.10 One respondent commented that the table and flow chart in the introductory section were helpful visual aids for understanding the PRA’s proposals and suggested they would welcome similar visual aids in future consultations.

1.11 In some areas, respondents sought additional clarification and guidance related to the interaction of the proposals with the PRA’s secondary objectives and the matters to which it must have regard when making policy.

1.12 In addition, respondents requested adjustments to specific proposals in favour of treatments that they considered would be more flexible or proportionate. Respondents also provided input on existing PRA policy, in particular contents of SS2/18.

1.13 These observations and requests for clarification are set out in detail Chapter 2.

Changes to draft policy

Changes driven by CP responses received

1.14 Having considered the responses to CP21/23, the PRA has made a minor change to SS44/15 and to the draft SoP:

• to replace the term ‘policyholder’ with ‘insurance policyholder’ in SS44/15 and the SoP in several instances, to clarify that the PRA does not expect reinsurance claims of third-country branch undertakings to have priority over general creditors.

1.15 The PRA has made minor changes to the draft SoP:

• in paragraph 2.23, to clarify that the PRA will seek and consider, where appropriate, the home supervisor’s views on the third-country branch during both its review of the application for authorisation and in its ongoing supervision;
• in Chapter 2, several amendments and clarifications regarding the PRA’s assessment of the home jurisdiction’s supervisory equivalence.

1.16 The PRA does not consider these changes to be significant and will not alter the cost benefit analysis presented in Chapter 2 of CP21/23. These are minor updates to improve clarity for firms. Similarly, the PRA also does not consider that these amendments will have a significantly different impact on mutuals relative to the impact on other PRA-authorised firms.

1.17 These amendments are discussed in more detail in the ‘Feedback to responses’ section of Chapter 2.

Changes driven by the PRA

1.18 The PRA has made several minor drafting changes to the proposed SS44/15 on its own initiative:

• removing the reference to the FCA SMF16 in paragraph 11.1 to avoid ambiguity, as the FCA’s expectations for Senior Management Function (SMF) role holders for insurance third-country branches are set out in FCA policy;
• removing paragraphs 11.2 and 11.4, given that this text already exists in SS35/15 – Strengthening individual accountability in insurance, which is applicable to third-country branches.

1.19 The PRA has also made some drafting changes to the draft SoP on its own initiative:

• Minor redrafting amendments to improve readability and flow across the SoP;
• Modifying paragraph 1.5 to include reference to the PRA’s secondary competitiveness and growth objective.
• Modifying paragraph 2.14, which stated that the PRA’s assessment of the ‘broad equivalence’ of a home jurisdiction’s supervision regime is not based on proportionality and is independent of the nature and scale of activities carried out by the third-country branch. Upon reconsideration the PRA has changed the wording to improve alignment between banking and insurance policies. The PRA clarifies that the concept of broad equivalence is similar to the ‘sufficiently equivalent home supervisor’ concept used for bank third country branches, as detailed in SS5/21: International banks: The PRA’s approach to branch and subsidiary supervision. Paragraph 2.14 therefore now reads as follows:
  • The PRA’s determination of a home jurisdiction’s supervisory equivalence may consider and be conditioned by the nature, scale and complexity of activities to be carried out by the applicant third-country branch. The PRA will not publish the results of these equivalence assessments.
• Correcting the number of branch authorisation applications received by the PRA in paragraph 1.6 from ‘over 180’ to 118. The Temporary Permissions Regime (TPR) ended on 30 December 2023, following the publication of CP21/23 in October 2023. Following the end of the TPR, the PRA has finalised its data on the number of firms that had submitted applications for authorisation and confirms that, while 181 firms entered the TPR, only 118 submitted applications for authorisation. The PRA therefore considers it appropriate to update the SoP in line with the finalised figures.

1.20 The PRA does not consider these changes to be significant and will not alter the cost benefit analysis presented in Chapter 2 of CP21/23. Similarly, the PRA also does not consider that the impact of the amendments will have a significantly different impact on mutuals relative to the impact on other PRA-authorised firms.

Implementation

1.21 The PRA has published the final version of the new SoP – the PRA’s approach to insurance branch authorisation and supervision, the updates to SS44/15 presented in two versions to account for the changes introduced in PS3/24, and the updates to SS20/16 alongside this PS. The implementation date is 23 May 2024, other than that of the future version of SS44/15. The implementation date of the latter is 31 December 2024.

1.22 References related to the UK’s membership of the EU in the SS and SoP covered by the policy in this PS have been updated as part of this PS to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of assimilated law.^{footnote [1]}

2: Feedback to responses

2.1 The PRA must consider representations that are made to it in accordance with its duty to consult on its general policies and practices and must publish, in such manner as it thinks fit, responses to the representations.

2.2 The PRA has considered the representations received in response to the CP. This chapter sets out the PRA’s feedback to those responses, and its final decisions.

2.3 The sections below have been structured broadly along the same lines as the chapters of CP21/23, with some areas rearranged to better respond to related issues. The responses have been grouped as follows:

New policy proposals consulted in CP21/23

• Outwards reinsurance arrangements of the third-country branch and third-country branch undertaking;
• Own Risk Solvency Assessment (ORSA);
• The Senior Managers and Certification Regime (SM&CR);
• Size of the branch vs legal entity;
• Notifications; and
• Re-domiciliation.

Existing policy out of scope of proposals set out in CP21/23

• Broad equivalence of home state supervision and supervisory cooperation;
• Resolution;
• Pure reinsurance branches;
• Financial Services Compensation Scheme (FSCS) subsidiarisation threshold; and
• Waivers and Modifications by Consent (MbCs).

New policy proposals consulted in CP21/23

Outwards reinsurance arrangements of third-country branch and third-country branch undertaking

2.4 In Chapter 2 of CP21/23, the PRA outlined its proposed approach to assessing the reinsurance arrangements of third-country branches and third-country branch undertakings.

2.5 Responses addressed a variety of aspects of the PRA’s proposals. After considering these responses, the PRA has amended paragraph 2.23 of the SoP. To aid readability, the PRA has subdivided this section as follows:

• Intra-group reinsurance
• Home supervisor assessment of reinsurance arrangements
• Other aspects
• Cost benefit analysis – reinsurance arrangements

2.6 One respondent agreed with the PRA's recognition of reinsurance as an important component of well-functioning insurance markets, which allows insurers to achieve the balance of underwriting and credit risk management in line with their risk appetite while continuing to deliver for their clients.

Intra-group reinsurance

2.7 One respondent commented that encouraging intra-group reinsurance is sensible and aligns with existing and common risk management practices as it allows for the pooling of capital and liquidity. Another respondent commented that the PRA should not include intra-group reinsurance arrangements as a subsidiarisation flight path criteria and as a specific counterparty risk. The respondent argued that this inclusion did not appear necessary as the PRA already assesses the adequacy of the home state insolvency, winddown and resolution regime via prioritising UK policyholder protection, and was separately proposing reducing the requirement to hold branch funds (covering the MCR) within the UK.

2.8 The PRA recognises the benefits of reinsurance in general, including intra-group reinsurance. The PRA’s approach to assessing intra-group reinsurance arrangements focuses on risks to branch supervisability and independence, where the third-country branch undertaking may become operationally heavily dependent on an intra-group entity.

Home supervisor assessment of reinsurance arrangements

2.9 Two respondents raised the issue of potential conflict between the PRA’s and the home supervisor’s approach regarding a third country-branch’s reinsurance arrangements where the reinsurance structures within the group have been validated at undertaking level with the home supervisor. The respondents argued that it would be problematic if a local approach to one specific branch challenged the previously agreed arrangements with the undertaking’s supervisory authority and suggested that the PRA should consider the home supervisor’s analysis for the matters linked to the branch undertaking.

2.10 The PRA clarifies that the case-by-case assessment of the outwards reinsurance arrangements of the third-country branch and the third-country branch undertaking includes the views of the home supervisor, as per the amended paragraph 2.23 of the SoP. The PRA reiterates the importance of supervisory cooperation to its approach to the authorisation and supervision of third country branches, as stated in the SoP.

Other aspects

2.11 Two respondents commented that reinsurance risk appetites should not be informed by the total volume of FSCS-protected business as a proportion of total third-country branch liabilities, as reinsurance does not increase risks to FSCS policyholders. The respondents argued that conflating FSCS with reinsurance could counteract the policyholder protection.

2.12 The PRA recognises the importance of reinsurance as a risk management tool and notes that the proportion of FSCS-protected liabilities of the third-country branch is only one factor in the PRA’s case-by-case assessment of outwards reinsurance arrangements. Other factors are as set out in paragraphs 2.37-2.40 of the draft SoP. As set out in SS2/18, the PRA considers that the level of FSCS-protected liabilities is a strong indicator of the potential impact of failure of a branch to both policyholders and FSCS levy payers. Therefore, the PRA takes a more prudent approach to branches writing retail business with higher levels of reinsurance.

2.13 Four respondents commented that the PRA’s reinsurance risk appetites should take into account several other factors including: the strength of the home regulatory regime especially where this is deemed as broadly equivalent by the PRA, the financial strength of the parent to better understand the totality of the presented risk, and the quality (credit rating) of reinsurance on a case-by-case basis.

2.14 Three respondents commented that the PRA should also consider the degree of cooperation and transparency between the PRA and the home supervisor. The respondents suggested that reinsurance arrangements should be assessed based on their objectives, rather than their complexity and their intended purpose. The respondents further suggested that the PRA should assess reinsurance arrangements on a case-by-case basis.

2.15 The PRA confirms that it assesses the reinsurance arrangements on a case-by-case basis, as set out in paragraph 2.38 of the draft SoP, to determine whether they pose material risk to the PRA’s objectives. As set out in paragraph 2.39 of the SoP, the PRA considers a variety of factors. The PRA clarifies that assurances provided by home supervisors are considered in the PRA’s decision-making when assessing a third country branch’s reinsurance arrangements, as stated in the amended paragraph 2.23 of the SoP.

2.16 One respondent asked the PRA to provide more clarity about the acceptable levels of cession via the creation of high-level guidelines.

2.17 The PRA assesses the risks arising from the outwards reinsurance arrangements of a third-country branch on a case-by-case basis. Therefore, the PRA notes that acceptable levels of cession will vary depending on case specific factors and that they may differ on a firm by firm basis, making it difficult for the PRA to add quantitative detail to factors it set out in Table A of the draft SoP. The PRA considers that this approach is representative of the ‘risk based approach’ a number of respondents called for.

2.18 One respondent commented that the PRA should make a series of distinctions regarding the references to branch reinsurance agreements in the proposed Sections 2.37-2.40 of the draft SoP, the proposed amendments to SS20/16, and the Section 6A.3 of the draft amendments to SS44/15. The respondent argued that since third-country branches do not maintain a separate balance sheet and associated localised assets in their UK branch, a separate retrocessional reinsurance program for the branch is not typically purchased. The respondent suggested that the PRA should instead treat the reinsurance written through a third-country reinsurer’s UK branch as reinsurance written by that third-country reinsurer which would mean that recoveries under any reinsurance of that third-country reinsurer which include UK branch business within the subject business will not be paid by the retrocessionaire to the UK branch.

2.19 The PRA acknowledges that the reinsurance arrangements of the third-country branch undertaking may also cover the insurance liabilities of the third country branch. This informs the PRA’s approach to the assessment of the reinsurance arrangements of both the branch and the undertaking. The PRA expects branches to be able to identify, or notionally allocate on a best efforts basis, the aspects of the undertaking’s reinsurance treaties which relate to branch liabilities.

Cost benefit analysis (CBA) – reinsurance arrangements

2.20 The duty to conduct a CBA under FSMA applies when the PRA makes rules. However, the PRA carries out a CBA as a matter of good practice when consulting on policy changes. In CP21/23 (paragraphs 2.36 to 2.38, Chapter 2 – Cost benefit analysis), the PRA set out its assessment that by clarifying its approach to third-country branch reinsurance arrangements, it would increase regulatory transparency and reduce uncertainty surrounding the PRA’s expectations. In its CBA, the PRA considered the benefits of reduced need for firms to perform iterative analysis and the benefits of more information for firms to make changes to reinsurance arrangements, if deemed necessary, ahead of submitting an application. The PRA also considered the cost for firms that may need to amend their reinsurance arrangements because of the proposals in CP21/23.

2.21 The PRA considers that the CBA in CP21/23 remains valid. However, several respondents considered that the PRA's assessment of reinsurance arrangements deviates from the current approach. Therefore, the PRA provides further clarity and analysis on the CBA of its proposals in this policy statement.

2.22 The PRA has updated the CBA in this policy statement to provide further analysis on:

• how the costs of the proposals could differ for future applicants; and
• the impact of these proposals on the PRA’s secondary competitiveness and growth objective.

Impact on potential future applicants

2.23 Three respondents commented that the proposed stance of the PRA to assessing the outwards reinsurance arrangements of third-country branches appeared to be a deviation from the existing approach. One respondent commented that existing business models, which received authorisation through the Temporary Permissions Regime (TPR), may be inconsistent with the reinsurance arrangements outlined in the proposed approach in CP21/23. The respondents further enquired about which expectations apply to existing third-country branches and which apply to those applying for authorisation and suggested that the PRA implement a mechanism to allow existing treatments to continue as needed.

2.24 The PRA reiterates that the proposals in CP21/23 set out its existing approach to assessing the reinsurance arrangements of third-country branches. Further, the PRA has assessed the reinsurance arrangements of third-country branches for all third-country branches that applied for authorisation during the TPR, and in its subsequent ongoing supervision of all third-country branches using the approach set out in CP21/23. CP21/23 proposed to consolidate and formalise this approach to ensure transparency for all third-country branches.

2.25 The assessment of reinsurance arrangements informs the PRA’s assessment of ‘supervisability’, which was set out in SS2/18. However, the PRA acknowledges that its approach to the assessment of third-country branch reinsurance arrangements could appear to be a ‘significant departure’ based on the absence of this factor in SS2/18.

2.26 As the PRA has assessed the reinsurance arrangements of all third-country branches that applied for authorisation during the TPR, and in its subsequent ongoing supervision of all third-country branches, the PRA does not consider it likely that existing business models, which received authorisation through TPR, may be inconsistent with the reinsurance arrangements outlined in the proposed approach in CP21/23. For the same reason, the PRA does not consider that a mechanism is required to allow existing treatments to continue.

2.27 The PRA acknowledges that future applicants may incur costs if their business model relies on outwards reinsurance to the extent that it does not meet the PRA’s risk assessment of reinsurance arrangements. These might include costs associated with changing reinsurance arrangements, of deciding not to operate in the UK (foregone economic benefits) or the additional costs of choosing to apply as a subsidiary instead (the cost of restricted choice).

Impact on the PRA’s secondary competitiveness and growth objective

2.28 Three respondents suggested that limits on reinsurance could reduce appetite for UK branches, negatively affect competitiveness and limit the attractiveness of bringing UK insurance risks into reinsurance pools. The respondents highlighted that intra-group reinsurance in particular enables pooling of risk and increases diversity of underlying portfolios across the insurance industry and that the proposed restrictions could reduce UK policyholder diversification, particularly where the home state is equivalent, without increasing policyholder protection.

2.29 The PRA’s secondary competitiveness and growth objective requires the PRA to act, so far as reasonably possible, in a way that facilitates the UK economy’s international competitiveness and its growth over the medium to long term, subject to alignment with international standards. As outlined in CP21/23, the PRA has assessed that its proposals would advance its secondary objective through clarifying the PRA’s approach and expectations for third-country branches, which may encourage international insurers to apply to operate in the UK through a branch, given that applications will be assessed against a clear and consistent set of criteria.

2.30 Whilst the primary objective can be advanced through the diversification of risk through reinsurance, to the benefit of policyholders, this must be balanced with the advancement of the primary objective through the PRA’s case-by-case assessment of supervisability. The PRA’s assessment of supervisability is informed by the PRA’s case-by-case assessment of reinsurance arrangements. Overreliance on reinsurance can undermine the substance in a legal entity and impact the incentives for prudent risk selection and management. The PRA clarifies that pursuing its secondary objectives cannot come at the expense of its primary objectives to promote the safety and soundness of insurance firms and to contribute to the securing of an appropriate degree of protection for policyholders.

2.31 The PRA acknowledges that there could potentially be some small impacts on its secondary objective as a result of setting out its approach to assessing reinsurance arrangements. Authorised third-country branches might choose to apply to cancel permissions and exit the UK, if the PRA’s assessment of reinsurance arrangements made a branch model unviable and a subsidiary model was also unviable for other reasons. However, in practice, as set out in paragraph 2.26 above, the PRA has not observed any significant such impacts during the process of reviewing 118 branch applications during the TPR. Where the PRA sought changes to reinsurance arrangements, the applicants agreed to do so and where appropriate they were given time to make these changes in line with the PRA’s ‘glidepath’ approach as set-out in the SoP.

Own Risk and Solvency Assessment (ORSA) reporting

2.32 As part of Chapter 2 of CP21/23 and Chapter 9 of the proposed draft amendments to SS44/15, the PRA set out its approach to ORSA reporting and proposed to allow third-country branches to submit the third-country branch undertaking’s ORSA in lieu of a separate third-country branch ORSA.

2.33 Four respondents suggested the PRA should be proportionate in applying the ORSA requirements. Three of these respondents further suggested that the PRA should set a threshold on the requirement for ORSA submission to apply only to Category 1 and Category 2 branches, arguing that the Category 3 and Category 4 branches have lower impact on the UK’s financial stability.

2.34 As set out in draft SS44/15, paragraph 9.1, the PRA already proposed to adopt a proportionate approach to the ORSA submission. However, the PRA has not set thresholds for submitting ORSAs and views the ORSA as an important tool for third-country branches and the PRA’s ongoing supervision of third-country branches. The PRA considers retaining ORSA requirements proportionate in view of the deletion of the requirement to produce a Regular Supervisory Report that forms part of the HM Treasury (HMT) and the PRA’s Solvency II reforms implemented at year-end 2023, as per the PRA’s public statement on the Solvency II Review: considerations for year-end 2023.

2.35 Two respondents asked whether the third-country branch should notify the PRA of its intended approach to submit its own specific ORSA or the third-country branch undertaking’s ORSA. These respondents also asked which supervisory authority would decide whether an undertaking level ORSA is sufficient to cover the branch.

2.36 The PRA confirms that it does not require notification from firms on their intended approach to submit the third-country branch undertaking ORSA or a separate branch ORSA. As set out in draft SS44/15, paragraph 9.1, branches should have discussions with their PRA supervisor if they need further guidance. The PRA also clarifies that it will decide on the sufficiency of the PRA submissions and that the home supervisory authorities will decide on regulatory submissions to the home supervisory authority. The PRA expects to liaise with the home supervisory authority to ensure that both supervisors have a shared understanding of the risk profile of the whole firm.

2.37 One respondent noted that the third-country branch undertaking’s ORSA contains confidential information in relation to business and activities that are not subject to the supervision of the PRA, noting that these sometimes relate to other branches of the company. Similarly, another respondent noted that the ORSA of the third-country branch undertaking would not fit the PRA’s purpose, arguing that this document did not focus on the risk profile of the branch and therefore may have less relevance for the branch supervisor. Two respondents suggested that branches should be allowed to submit an extract of the ORSA, with prior consent of the home supervisor. One respondent also requested clarity on what the PRA would expect to receive from firms since the removal of the Solvency Capital Requirement (SCR).

2.38 A branch of an international insurer forms part of a legal entity incorporated outside the UK. It follows that its operations are necessarily dependent on those of the legal entity as a whole. PRA authorisation applies to the whole firm. Therefore, the PRA considers that where it informs its risk assessment of the branch, the business and activities of the third-country branch undertaking are relevant to PRA supervision. The PRA clarifies that branches can submit a standalone branch ORSA or a legal entity ORSA, provided it covers at minimum the requirements set in paragraph 9.3 and 9.5 of SS44/15. The PRA confirms that these set requirements remain relevant following the removal of the SCR.

2.39 One respondent enquired whether the PRA would consider proposals to submit ORSA equivalent reports in respect of third-country branch undertakings operating under solvency regimes which have equivalence under Article 172 of the Solvency II Directive. Similarly, another respondent asked for wider clarification on the expected ORSA requirements and how these should be met by non-European Economic Area (EEA) firms, also noting that not all third-country branches will be subject to a group ORSA and for those that are, Solvency II is being reformed.

2.40 The PRA clarifies that ORSA-equivalent reports from third-country branches incoming from non-SII jurisdictions may be sufficient for the PRA’s purposes, subject to conversations with their PRA supervisor. The PRA highlights that, at a minimum, ORSA-equivalent reports will be expected to cover the requirements in paragraph 9.3 of SS44/15. Firms should speak to their supervisor in the first instance.

The Senior Managers & Certification Regime (SM&CR)

2.41 In Chapter 11 of the draft amendments to SS44/15, the PRA set out its requirements and expectations of how third-country branches should comply with the SMF rules.

2.42 One respondent asked the PRA to clarify whether key function holders were required for third country branch undertakings in all instances, as suggested in paragraph 11.2 of SS44/15.

2.43 The PRA notes that paragraph 11.2 has been deleted in both versions of SS44/15, to avoid duplication from SS35/15, as set out in paragraph 1.18 of this PS. As set out in its SS35/15 - Strengthening individual accountability in insurance, the PRA expects that third country branch undertakings need to establish at least the four minimum key functions in respect of the branch’s operations: risk management, compliance, internal audit and actuarial. Subsequently, the rules in Insurance ‐ Fitness and Propriety 4 will then apply in respect of those key functions. The PRA further clarifies that the relevant individuals responsible for these key functions will need to be notified to the PRA for an assessment of their fit and proper status if they will not directly be in either a PRA SMF or FCA controlled function.

2.44 One respondent asked the PRA to further clarify the segregation of responsibilities / topics in terms of potential conflicts of interest between the undertaking and the branch.

2.45 The PRA notes that it takes a proportionate supervisory approach, as set out in paragraph 11.2 of draft SS44/15, and considers that conflicts of interest will be dependent on firm-specific circumstances. The PRA expects third-country branch undertakings to conduct their own analysis regarding any conflicts of interest and manage those appropriately. Branches should discuss with their PRA supervisor if further guidance is needed.

2.46 Paragraph 11.4 of draft SS44/15 set out that an individual is expected to apply to the PRA for approval where they are appointed to a specific function, and their role is ‘dedicated to the undertaking’s operations in the UK’. One respondent asked the PRA to clarify whether this was only the case where an individual’s role was ‘wholly dedicated’ to the operations in the UK, such that if a manager has a wider role within the entity, they are outside of the scope of the SMF regime.

2.47 The PRA notes that paragraph 11.4 has been deleted in both versions of SS44/15 due to duplication from SS35/15, as set out in paragraph 1.18 of this PS. The PRA clarifies that where a third-country branch undertaking has a key function holder acting as Chief Finance Officer, Chief Risk Officer, Chief Actuary, Chief Underwriting Officer or Head of Internal Audit functions and that person's role is solely dedicated to the branch, then it would expect the firm to apply for approval for the relevant functions. Conversely, where that individual’s role is not wholly dedicated to the branch, the PRA would not expect them to apply for approval, but they should still notify the PRA of their identity and provide relevant personal information as appropriate. The third-country branch undertaking should assess whether that individual is carrying out the role of a Group Entity Senior Manager - SMF 7 - in which case they must apply for PRA approval as per paragraph 2.21 of SS35/15.

Size of the branch vs. legal entity

2.48 Within chapter 2 of the proposed draft SoP, the PRA outlined that it will assess, amongst other factors, the relative size of the third-country branch as compared to the third-country branch undertaking when reviewing the potential impact of a third-country branch on financial stability.

2.49 One respondent raised concerns about the PRA’s assumptions that branches may be hard to supervise because of the relative size compared to the undertaking and suggested that the business models of PRA-authorised branches may be called into question if this is applied as a blanket policy. The respondent further noted this policy may be misinterpreted as the PRA suggesting that home supervisors are not properly equipped to supervise UK branches. They therefore encouraged the PRA to continue to adopt an evidence and risk-based approach when assessing the supervisability of a branch, as well as discussing any supervisability issues with the home state regulators.

2.50 As set out in para 2.35 of the proposed draft SoP, the PRA has already proposed to take a proportionate approach to assessing the relative size of the branch and that it will consider third-country branch specific factors on a case-by-case basis. The PRA further confirms that this includes all relevant factors such as the third-country branch’s potential impact category, as well as ability to be effectively supervised by the home supervisor, as set out in paragraphs 2.34 to 2.36 of the SoP. The PRA needs to be satisfied that the home jurisdiction’s prudential regime is broadly equivalent in any case, but the PRA considers that where the third-country branch undertaking’s liabilities and premiums are disproportionately weighted towards the UK branch, this may make it more difficult for the home supervisor to supervise the whole undertaking in practice. The PRA confirms it will usually discuss this with the home supervisor.

2.51 Another respondent requested that the PRA clarifies the meaning behind paragraph 2.6 of CP21/23, enquiring whether the PRA is referring to situations where a firm does most of its UK business through its UK branch, or circumstances where a third-country branch does most of its non-UK business out of a UK branch.

2.52 The PRA confirms that it considers the relative size of the UK branch's operations as a proportion of the operations of the whole third-country branch undertaking, to be an important factor in assessing the supervisability of the third-country branch. As set out in paragraph 2.34 of the SoP, the PRA will consider metrics including the total premiums and total liabilities of the UK branch as a proportion of the total premiums and total liabilities of the whole undertaking, and where those measures are disproportionately weighted towards the branch, the PRA may engage further with the branch and the home supervisor.

Notifications

2.53 Within Chapter 6 of the proposed draft amendments to SS44/15, the PRA set out some examples of circumstances in which the PRA would expect notification from third-country branches in line with its Fundamental Rule 7.

2.54 One respondent expressed concern regarding the PRA’s expectation that branches notify it when reinsurance arrangements change materially from the point of authorisation, arguing that this is not required for subsidiaries. The respondent noted that if such a change alters the risk profile of the branch, it would be covered in the ORSA anyway.

2.55 The PRA clarifies that setting this notification requirement is a proportionate approach given that the PRA has limited supervisory oversight of a third-country branch undertaking. The PRA considers that if reinsurance cessions of the third-country branch undertaking become materially larger, this could impede supervisability of the third country branch. The PRA notes that as set out in Notifications 2.3 of the PRA’s Rulebook, it is a standard requirement for a firm (including a subsidiary) to notify their supervisor when its risk profile changes or when the firm is considering entering an arrangement that could alter its risk profile. The PRA further clarifies that a change notification can take place via any appropriate channel, including through contact with the supervisor.

2.56 The same respondent requested that the PRA confirm whether each of the information sharing requests set out in paragraph 6.8A are ‘with regard to branch operations’, and whether the reference to ‘supervisor’ is the PRA supervisor or the home supervisor.

2.57 The PRA notes that paragraph 6.8A was introduced as part of CP12/23 and therefore was not considered in this consultation. However, for transparency, the PRA confirms that the reference to ‘with regard to branch operations’ applies to each information sharing request. The PRA also clarifies that the reference to ‘supervisor’ in paragraph 6.8A should be read as the firm’s PRA supervisor.

Re-domiciliation

2.58 In Chapter 13 of draft SS44/15 the PRA set out its proposed approach to re-domiciliation, outlining its expectations in cases where a third-country branch undertaking that is authorised to operate as a third-country branch re-domiciles to another home jurisdiction.

2.59 One respondent supported the PRA’s pragmatic approach to re-domiciliation where countries are considered broadly equivalent, and asked to clarify what the PRA’s expectations are of any states that are not considered broadly equivalent.

2.60 The PRA has considered this feedback and has decided not to amend SS44/15. The PRA notes that for any re-domiciliation applications it expects a new application as set out in paragraph 2.12 of the SoP and therefore it needs to be satisfied regarding the new home jurisdiction’s broad equivalence.

2.61 Another respondent commented that firms undertaking restructuring or redomiciling will need to engage with their existing home state, new home state and other relevant regulators and noted that timing of authorisation is often critical to the effective transfer and ensures customers are not disadvantaged by a gap in authorisation. The latter respondent noted that any ‘re-application’ should be proportionate to the substance of any change and reflect that the legal entity already holds Part 4A permission.

2.62 As set out in draft SS44/15, chapter 13, the PRA has already recognised that the submission of an entirely new branch application would be unduly burdensome for firms in some cases. The PRA confirms it will take a proportionate approach in its assessment and streamline the new authorisation process where possible, focusing primarily on the changes resulting from the re-domiciliation and any other relevant factors (such as the recency of the last authorisation application).

Topics which were not consulted on in CP21/23

Broad equivalence of home state supervision and supervisory cooperation

2.63 In Chapter 2 of the draft SoP, the PRA set out that it will only authorise third-country branches from ‘broadly equivalent’ jurisdictions.

2.64 Three respondents suggested that the PRA should communicate publicly/publish a list of broadly equivalent jurisdictions, as well as a list of jurisdictions with whom the PRA has entered into a Memorandum of Understanding (MoU). The respondents argued that this would encourage international insurers to set up branches in the UK. One of these respondents asked if the existence of a MoU indicated good relations and whether there were different regulatory expectations where no MoU existed. In addition, the respondent asked whether a review of broad equivalence would be triggered if a proposal to establish a branch were presented to the PRA. One of the above respondents also asked about the PRA’s appetite for adding new territories to the list of broadly equivalent jurisdictions, stating that the policy should not be EU only focused.

2.65 The PRA confirms that it does not publish the results of its equivalence assessments, as set out in paragraph 2.14 of the SoP. The PRA further confirms that it initiates assessments of the supervisory equivalence of jurisdictions according to whether firms have applied to operate in the UK, as set out in paragraph 2.12 of the SoP. Firms should refer to their supervisor or authorisations case officer for information specific to their circumstances. The concluded MoUs are available on the Bank of England’s website. However, the PRA clarifies that a signed MoU does not necessarily translate to a jurisdiction being considered as broadly equivalent.

2.66 One respondent suggested that the PRA should clarify the definition of ‘broad equivalence’, set out whether it is different to Solvency II equivalence and clarify if there is a link between these two. Another respondent noted that ‘broadly equivalent’ is unclear and may cause uncertainty for firms.

2.67 The PRA notes that broad equivalence is solely applicable to its policy in relation to authorisation of third country branches, as set out in the PRA’s insurance approach, which is different from the concept of the SII equivalence. There is no explicit link between these two concepts. For clarification purposes, the PRA has made minor amendments in the related text as per paragraph 1.15 of this PS.

2.68 One respondent suggested that the PRA should consider bilateral agreements as a factor in assessing risks of a third-country branch, flagging specifically the US-UK Covered Agreement. The respondent argued that this agreement should constitute equivalence and that revisions to the policy documents may be needed to reflect such Agreements. Another respondent suggested that the PRA should consider home state outsourcing and operational resilience requirements as part of its broad equivalence assessments.

2.69 Having considered these comments the PRA has decided not to revise the policy documents. The PRA considers several factors in assessing supervisory equivalence of home jurisdictions, as set out in paragraph 2.13 of the SoP. Firms should expect their supervisor or case officer to explain the process and any final determination that is made as part of the application process.

2.70 Within Chapter 2 of the proposed draft SoP, the PRA outlined the criteria it uses to assess whether there is sufficient supervisory cooperation with the home supervisor by setting out the high-level outcomes the PRA would expect to see, as well as its approach to memoranda of understanding and split of responsibilities agreements.

2.71 One respondent welcomed the chapter, noting the PRA’s coordination with home regulators and commented that, in the past, firms have experienced difficulties dealing with requirements and expectations set by the home state supervisor compared to the expectations set out by the PRA. The respondent suggested that in some extreme cases, this has resulted in regulators communicating to firms certain limitations about sharing some information requested by other regulators. The same respondent commented that these situations put firms in a difficult position and argued that it is important that regulators remedy this under the new proposed regime.

2.72 The PRA has not made changes to proposed policy. The PRA agrees that information sharing with home supervisors and supervisory cooperation are important. The PRA expects that the increased regulatory transparency and further clarity provided by the proposals included in the CP with regards to its host supervisory expectations would also result in more effective collaboration with home supervisors. The PRA reiterates its commitments in achieving this as outlined in the draft SoP: regular engagement with the home supervisor through colleges and/or bilateral engagement, signing of MoUs and Spilt of responsibilities (SoR) agreements that enhance co-operation and information sharing where appropriate. As stated in the SoP, the PRA intends to place reliance on the home supervisor. Conversely, where the PRA judges that reliance on the home supervisor isn’t possible, or that information is not shared as required, it may need to consider alternative supervisory actions.

Resolution

2.73 Within Chapter 2 of the draft SoP and Chapter 3 of the proposed amendments of the draft SS44/15, the PRA sets out its assessment criteria for considering UK policyholder protection and fairness of treatment of UK policyholders in insolvency and winding up, as well as expectations regarding availability of assets in winding up.

2.74 Two respondents noted that the use of the phrase ‘UK policyholders should be given appropriate priority in a winding-up scenario’ throughout the policy documents suggests that the PRA expects reinsurance claims of third-country branch undertakings to have priority over general creditors, which is not the case under UK legislation. The respondents suggested that the reference to ‘policyholders’ should be to amended to ‘insurance policyholders’.

2.75 Having considered these responses, the PRA has decided to maintain the level of application proposal as set out in CP21/23, but has revised the wording to make clearer how the PRA arrives at its guidance and replaced ‘policyholder’ with ‘insurance policyholder’ in several instances in both versions of SS44/15 and the SoP. In addition, the revised SS and SoP texts clarify that policyholders refers to policyholders with direct claims under a contract of insurance, in accordance with The Insurers (Reorganisation and Winding Up) Regulations 2004.

2.76 One respondent noted that the paragraph 3.4A of SS44/15 refers to a firm’s exit plans, which was not mentioned in the CP, and requested clarity on whether there is any change in the PRA’s expectations in this regard.

2.77 The PRA notes that paragraph 3.4A of SS44/15 was not consulted on as part of the CP21/23 consultation and notes that it was consulted on as part of CP12/23 that preceded PS3/24. Consequently, the PRA confirms that this expectation has not changed.

Pure reinsurance branches

2.78 One respondent suggested that the PRA consider the proportionate assessment of costs and benefits from the ‘Better Regulation Framework’ as applicable to reinsurance branches, commenting that pure reinsurance branches should receive lighter touch treatment than insurance branches. For example, the respondent argued that pure reinsurance branches should not be capitalised, should not be required to localise assets, and should not be assessed for financial soundness at the branch level, given that the cedent has access to the financial strength at the branching reinsurer’s entity level.

2.79 As set out in Third Country Branches 3.1 and 3.3 of the PRA Rulebook, the PRA does not require pure reinsurance branches to hold assets in the UK to cover the Solvency Capital Requirement (SCR), nor to hold on deposit as security. Furthermore, as part of PS3/24, the PRA set out fewer reporting requirements for pure reinsurance branches, as compared to insurance third-country branches, which are due to be implemented on 31 December 2024. The PRA further highlights that in the interim period before implementation of these rules, it offers a Modification by Consent (MbC) for pure reinsurance branches which waives rules relating to branch capital requirements and some other reporting.

FSCS subsidiarisation threshold

2.80 In Chapter 2 of the proposed draft SoP the PRA outlined its approach to assessing the scale of UK branch activity covered by the FSCS, including the PRA’s expectation for third-country branches to have under £500 million of insurance liabilities covered by the FSCS. This is existing PRA policy which was consulted upon by the PRA prior to the introduction of SS2/18. The proposal in CP21/23 was merely to transfer this text from the SS to the SoP without any change from SS2/18. The responses received are therefore out of scope, however, the PRA has provided clarifications below in some areas.

2.81 Three respondents commented that the indicative threshold for third-country branches to have under £500m of insurance liabilities covered by the FSCS was inappropriate because it was arbitrary, static in nature and did not consider wider market conditions such as inflation. One respondent further argued that the short-term volatility of FSCS liabilities was difficult to manage, making the threshold unsuitable. Two respondents suggested that total FSCS liabilities should be calculated on a net basis, after consideration of reinsurance.

2.82 Two respondents suggested that the PRA should consider intermediate solutions such as reporting or establishments of trusts, when discussing whether subsidiarisation is appropriate, particularly for larger branches. One respondent also suggested that the PRA should consider proportionality where the home state prudential regime has been assessed as providing adequate policyholder protection.

2.83 The PRA reiterates that the indicative threshold for the FSCS covered insurance liabilities of a third-country branch is the policy currently in application as per SS2/18; CP21/23 did not put forward any changes / amendments for respondents to consider. The PRA notes the representations received and confirms that any future PRA proposals for changes to the threshold will be subject to consultation.

2.84 Two respondents suggested that the £500m of FSCS liabilities threshold should be an indicative threshold that triggers firm discussions regarding subsidiarisation, and that the PRA should consider other factors such as the branch’s risk profile, the nature of the business written in the branch, credit ratings and reinsurance arrangements.

2.85 As set out in paragraph 2.29 of the SoP, and previously in SS2/18, the PRA confirms that the expectation for insurance third-country branches to have under £500m of insurance liabilities covered by the FSCS is not a 'hard threshold’.

2.86 One respondent noted the PRA’s intention to continue to adopt a proportionate approach when considering subsidiarisation, with the level of FSCS business being a key factor for consideration. They noted that the cost of imposing subsidiarisation based on a discretionary indicative threshold should not be misjudged, citing that expectations for subsidiarisation constitute a market barrier, which could harm the attractiveness of the London markets for a reinsurer trying to access the market.

2.87 The PRA clarifies that it will discuss the appropriateness of authorisation as a third-country branch with any insurers considered to be approaching the FSCS threshold for subsidiarisation. The PRA will assess each case on its own merits, amongst other factors taking into consideration the costs of subsidiarisation. The PRA confirms that where third-country branches can put in place sufficient mitigation (such as, but not limited to, business transfers, limitations on new business, demonstrable run-off profile for FSCS business), it will consider whether the expectation of subsidiarisation remains proportionate.

2.88 One respondent asked for clarification that the expectation for third-country branches to have less than £500m insurance liabilities covered by the FSCS does not apply to pure reinsurance branches.

2.89 The PRA confirms that as the FSCS does not currently cover any reinsurance products, the £500m FSCS total liabilities limit does not currently apply to pure reinsurance branches.

2.90 Five respondents noted the interaction between CP21/23 and DP2/23 – FSCS general insurance limit with regards to the discussed change to the small business definition in the latter. The respondents stated that if implemented, the change in definition would result in an increase in the number of small- and medium-sized enterprises (‘SMEs’) eligible for compensation under the FSCS and therefore could cause branches to breach the £500m FSCS threshold. Three of the respondents also stated that if this change were to be implemented, it could damage competition and the international competitiveness of the UK if the high costs of subsidiarisation led branches to withdraw from the UK.

2.91 The PRA notes that DP2/23 is out of scope for this PS. However, the PRA refers respondents to CP6/24 – Occasional consultation paper: April 2024 | Bank of England , published on 30 April 2024, which addresses the PRA’s intention not to propose changes to the SME definition.

Waivers and Modifications by Consent (MbCs)

2.92 Within Chapter 6 of the proposed draft amendments to SS44/15, the PRA noted that third-country branches should refer to ‘PRA Statement of Policy: Solvency II regulatory reporting waivers’ which specifies the PRA’s approach to waiving submission of certain Solvency II reporting requirements in the Reporting Part of the PRA Rulebook.

2.93 One respondent enquired whether the PRA would consider waivers from third-country pure reinsurance branches on an exceptional basis, citing the waiver available to Category 3 and 4 third-country insurance branches. The respondent also requested a clarification as to whether reporting templates could be populated with figures calculated in accordance with non-Solvency UK regimes if the PRA ‘did not intend to consider waivers for pure reinsurance branches’.

2.94 The PRA notes that all PRA regulated firms can apply for waivers and can be eligible for MbCs under s138A of FSMA. The PRA clarifies that waiver applications can be submitted for any PRA reporting requirements, including those first proposed in CP12/23.