Speaking at the Westminster and City conference on capital, risk and strategy last week, FSA director and insurance sector leader Sarah Wilson said the regulator has found evidence of weakness in systems and controls.
She said non-financial risks, such as strategic risk, business models, financial crime, including data security and employee fraud, as well as operational risks are key areas where insurers are falling short.
Wilson said some firms have failed to implement adequate practical arrangements to ensure they are prepared for managing risk in sharply changing market conditions.
She also urged insurers to identify “scenarios that would give senior management a clear understanding of events that would lead their firm to financial failure”.
But Wilson reassured insurers that the industry is better prepared to weather stressed market conditions than it was in the last bear market of 2003.
She said the current capital regime is more sophistica- ted and designed to deal with extreme market conditions.
Wilson said: “Back in 2003, we had a regulatory regime that was not risk-sensitive, did not require insurers to hold capital to meet all their promises to policyholders and did not encourage good standards of risk management. In short, it was not fit for purpose, and the reforms we introduced in 2004 transformed the capital regime for insurers.”