Sid Malik talks to Dan Georgescu about the wide-ranging and boundary-bridging actuarial roles carried out at the Prudential Regulation Authority, as well as the pressing issues it is currently tackling
Sid Malik, head of life insurance and pension risk at the Bank of England’s Prudential Regulation Authority (PRA), starts off by passionately setting out the ‘three Ps’ that motivate him to work at the PRA: the organisation’s public service role; the collaborative, supportive and dedicated people you get to work with and learn from; and the job proposition, which offers a variety of experience in terms of both breadth and depth, as well as a culture of wellbeing and a good work-life balance.
There are around 100 actuaries working at the Bank of England, mostly within the PRA, which has two dedicated actuarial divisions in Supervision for life and non-life insurance. The Prudential Policy Directorate also employs many actuaries, and there are others working across the organisation in various areas, including data analytics and frontline supervision.
The work they carry out is both varied and interesting. “Right now, actuaries across the organisation are involved in potential reforms to Solvency II, designing and implementing a prudential regime for the UK,” Malik explains. “We’ve also been busy throughout the pandemic, informing the regulatory response to COVID-19 through emergency stress testing and resilience work.”
‘Business as usual’ work at the Bank, which runs alongside such projects, is similarly varied. At any given time,actuaries will be involved in research and analysis on industry-wide projects such as catastrophe modelling or stress testing, including climate stress testing. There is also ongoing firm-specific work, such as mergers, acquisitions and other corporate transactions, internal model changes, and other Solvency II approvals, such as matching or volatility adjustment.
PRA actuaries also contribute to the wider supervisory agenda. This could involve undertaking capital quality and liquidity reviews, business model analysis and own risk and solvency assessment reviews, and reviewing firms’ internal credit ratings frameworks. “This all gives good opportunities for engagement with firms, as well as exposure to areas of firms’ business models that lie outside the traditional actuarial ‘remit’,” says Malik. Bank staff are also actively encouraged to obtain experience in different areas,so there are opportunities for actuaries to be involved in wider interests, such as banking supervision, banknotes and monetary analysis.
Regulators are sometimes accused of legislating in an ivory tower, at a distance from the day-to-day practicalities of running an insurance company. Malik believes the best way to prevent this outcome is to build a good relationship between the Bank and industry – and the key to that is the same as for any other positive working relationship: clear and ongoing communication, and an understanding of each other’s perspectives.
“The ongoing pandemic has highlighted that some of the practicalities faced by industry are not so far away from those we face as a regulator – for example reacting to resource pressures or external environment uncertainties,” he says. “Sharing information in a timely way, planning regulatory engagement as far ahead as possible, and being open about why we are asking for information are key ingredients in building good two-way relationships between the Bank and industry.”
Because of this, while actuaries tend to lead on the more technical aspects of regulatory engagement (such as capital modelling using digital analytics), they also support those working on insurance supervision in broader regulatory discussions (such as regular engagement with chief risk officers). Malik also highlights that the Bank has a range of individuals who have vast experience of working in various areas of the insurance industry, and that it continually strives to “balance direct industry expertise with fresh perspectives – to ensure that we are providing the right level and strength of challenge in our regulatory dialogues.”
Responding to climate change
Climate change is one of the biggest issues affecting the landscape in which both firms and the Bank operate – and the latter has been at the forefront of calling for climate action since 2015, when the then Governor Mark Carney made his seminal speech on climate change and financial stability, ‘Breaking the Tragedy of the Horizon’.
“The ongoing pandemic has highlighted that some of the practicalities faced by industry are not so far away from those we face as a regulator”
Malik explains the Bank’s approach to driving this agenda forwards: “The Bank believes in co-ordinated action at an international level, so we are working hand in hand with other central banks, regulators such as the Financial Conduct Authority, and the government. This includes ensuring the financial system is resilient to climate-related risks, promoting the Task Force on Climate-related Financial Disclosures, and supporting an orderly transition to net zero.
“The Bank is also working hard to demonstrate best practice in its own operations,” he continues. “Earlier this year, the Chancellor updated the remit and recommendation letters to the three main policy committees to include an explicit reference to the commitment to net zero by 2050, as part of supporting the government’s economic strategy.”
One specific project within this area is the Climate Biennial Exploratory Scenario, run in partnership between the actuarial teams and those working in banking supervision, financial stability and the Bank’s Climate Hub. The largest banks and insurers have recently submitted their returns to this ambitious exercise, and the team is now analysing those submissions to determine the best regulatory response.
In addition, the Bank wrote to all regulated firms in July 2020 to provide additional guidance and feedback on its Supervisory Statement on climate, and set a deadline to fully embed these expectations by the end of 2021 – so there is a lot of supervisory focus on monitoring and engaging with firms in the run-up to this point.
The impact of Brexit
Another significant external factor impacting the work of the Bank and the financial industry has, of course, been Brexit, which has affected some actuarial regulatory activities. Specifically, there is now a need to produce and publish monthly technical information for UK firms, including the risk-free rate, fundamental spread and volatility adjustment.
PRA actuaries have taken a leading role in designing, developing and implementing the UK’s own process as it takes over this task, which used to be carried out by the European Insurance and Occupational Pensions Authority (EIOPA). “We have been producing this information for the past few months, diverging from EIOPA’s methodology where appropriate to better reflect the UK insurance market – including updated volatility adjusment reference portfolios, and calculating GBP risk-free rates based on the Sterling Overnight Indexed Average rather than the London Inter-Bank Offered Rate,” says Malik.
There is also the review of the regulatory regime, following the Treasury’s call for evidence. The PRA is aiming to consult on and implement improvements to the Solvency II regime in areas such as the matching adjustment and risk margin, approvals, and regulatory reporting. A multidisciplinary PRA team launched the Quantitative Impact Study in July, and is in the process of engaging with UK insurance firms to give them more explanations about the process. Firms’ responses will be analysed to inform the development of policy proposals for consultation.
What is on the horizon for insurance regulators at the Bank? “We will continue to focus on reviewing UK insurance firms’ credit risk management and modelling, particularly in relation to illiquid assets,” says Malik. “For equity release mortgages (ERMs), we are working with firms to understand how they will be meeting our expectation that firms should comply with the effective value test when applied to their ERM securitisations by the end of 2021, both in base and stressed conditions.
“For other illiquid assets, we are challenging firms regarding how their internal credit assessments are mapped to credit quality steps for fundamental spread calculation purposes, and the robustness of their risk identification and modelling processes for solvency capital requirement calculation purposes.
The resilience of the system is also a major issue: “The Bank published its Policy Statement on Operational Resilience earlier this year; this will continue to be a focus for banks and insurers in the coming year, and links very strongly to the Bank’s ongoing work on cyber risk,” says Malik.
“A key part of this is collaboration across boundaries, including with international regulators and with the industry, to assess risks and build resilience across the financial system.”