Prudential Regulation Authority Rulebook

2.1

The insurance risks covered by general insurers, particularly those operating in the specialist London Market, include complex, low-probability, high-severity events for which limited data might be available to quantify potential exposures accurately. For such firms, individual large claims (or a combination of claims) might, in certain circumstances, impact significantly their capital resources or future business plans.

2.2

This SS does not attempt to forecast the potential likelihood or impact of such a major general insurance loss event. Instead, it starts from the premise that an extreme general insurance loss event has occurred, impacting multiple insurers, but makes no assumption about the cause of the event. The event in question is assumed to be sufficiently material to cause some or all of the following consequences, although this may not be an exhaustive list:

• the event is likely to generate significant insurance claims (potentially, large in size), across one or more lines of business, to a number of firms operating in the general insurance market;
• the full extent of likely claims and their eventual settlement cost might take some time to be known with certainty;^[6]
• some firms might have been impacted severely by the event, to the extent that their potential losses mean they might no longer have sufficient financial resources to meet their regulatory capital requirements;
• given the initial uncertainties involved in estimating claims, some affected firms might not know for some time how the event has impacted their overall regulatory capital position, or the full nature of the claims to which they are exposed;
• some other firms might not be impacted at all by claims from the event, or are impacted to a much lesser extent (eg depending on capital resources, reinsurance arrangements or risk profile);
• the event impacts prevailing market conditions for general insurance products including the availability, price and/or terms of insurance coverage that firms are able to offer policyholders for future policies. The impact might or might not be limited to the class(es) of business most directly affected by the event;
• if premium rates rise, some firms are likely to wish to take advantage of this to write more business; and
• some firms might need to raise additional capital to continue to trade, or might wish to raise additional capital to take advantage of perceived market opportunities. Sources of capital could include a parent company, or third-party investors.

2.3

A significant general insurance event which has many of these consequences is referred to in this SS as a MTE. In reality, ‘event’ for these purposes might be one very large single insurance loss event, a combination of significant individual insurance loss events, or a combination of an insurance event and a secondary simultaneous disruption (e.g. a wider dislocation in financial markets). A MTE may also have characteristics that make it distinct to a more typical large insurance event, such as being unusual, unexpected, un-modelled or hard to price. These characteristics may increase the uncertainty experienced by general insurers following a MTE.