When it comes to the financial services industry, few sectors are as critical—and complex—as insurance. Behind the scenes, regulatory bodies work tirelessly to ensure that insurers remain solvent, stable, and resilient against economic shocks. In the UK, the Prudential Regulation Authority (PRA) plays this vital role. But what exactly does the PRA do in the insurance sector? How did it come to exist? And why does its work matter so much to policyholders and the broader economy?
Let’s explore the history, purpose, and ongoing responsibilities of the PRA in the context of insurance regulation.
Origins: From Crisis to Reform
The PRA was established on 1 April 2013 as part of a major overhaul of UK financial regulation following the 2008 global financial crisis. Before that, the now-defunct Financial Services Authority (FSA) oversaw both prudential and conduct regulation.
However, the financial crisis exposed weaknesses in this model, particularly in overseeing large, complex financial institutions. In response, the UK government split regulatory duties:
-Prudential regulation (focusing on the financial soundness of firms) was given to the newly formed PRA, housed within the Bank of England.
-Conduct regulation (focusing on consumer protection and market conduct) went to the newly created Financial Conduct Authority (FCA).
This dual-regulator system remains in place today.
What is the PRA?
The Prudential Regulation Authority is part of the Bank of England and is responsible for the prudential supervision of:
-Banks and credit unions
-Building societies
-Insurance companies
Its core mission is to promote the safety and soundness of the firms it regulates, with a specific insurance-related objective: to contribute to securing an appropriate degree of protection for policyholders.
The PRA’s Role in Insurance
The PRA’s oversight of insurers includes:
1. Solvency Supervision
Insurers must maintain sufficient capital reserves to meet their obligations to policyholders, even in adverse scenarios. The PRA enforces the Solvency II framework, a risk-based capital regime adopted across the UK and Europe (now being reviewed post-Brexit).
2. Risk Management and Governance
The PRA assesses insurers’ governance arrangements, internal controls, and risk management systems. It expects firms to identify, monitor, and manage key risks, including underwriting, investment, operational, and climate-related risks.
3. Stress Testing
The PRA conducts stress testing to ensure insurers can survive economic or sector-specific shocks, such as a pandemic, natural disaster, or market crash.
4. Supervisory Judgement
The PRA applies a judgement-based approach to supervision, focusing more intensively on larger or systemically important insurers. This enables it to intervene early when risks emerge.
Key Developments and Reforms
A. Solvency II and UK Reforms
Adopted in 2016, Solvency II standardised capital requirements across Europe. Post-Brexit, the PRA has been working with HM Treasury to reform Solvency II for the UK market, aiming to:
Reduce unnecessary regulatory burdens
Encourage long-term investment
Maintain high standards of policyholder protection
B. Climate Risk Supervision
The PRA has been at the forefront of integrating climate-related financial risks into supervision. Insurers are now expected to:
Understand how climate change impacts their liabilities and investments
Integrate climate risk into governance and actuarial models
C. Recovery and Resolution Planning
The PRA requires large insurers to develop recovery plans (for financial distress) and resolution plans (in case of failure), ensuring continuity of policyholder protection and minimising systemic disruption.
How the PRA Works with the FCA
While the PRA and FCA have different mandates, they coordinate closely, especially in dual-regulated firms (which include most major insurers). The PRA focuses on financial soundness, while the FCA ensures fair treatment of customers and market integrity.
Why the PRA Matters to You
Whether you're a policyholder, insurance executive, or financial professional, the PRA’s work has a direct impact:
Policyholders benefit from greater confidence that insurers will be able to pay claims when needed.
Firms gain from a stable and resilient industry, which supports investment and long-term planning.
The economy is protected from systemic risks linked to insurer failures or shocks.
The PRA plays a vital role in the UK insurance sector, ensuring that insurers are financially strong, responsibly managed, and resilient to risk. Since its creation in 2013, the PRA has not only improved financial stability but also driven forward-thinking regulation—especially in areas like climate risk and reform of Solvency II. As the insurance landscape evolves, the PRA’s role remains critical in protecting policyholders and preserving trust in the financial system.
