The head of insurance supervision at UK regulator the Prudential Regulation Authority (PRA) has said the watchdog would probe deeper into the impact of facilities on carriers.

The move came after participants in a recent survey expressed worries about a lack of transparency and the potential for conflicts of interest.

In a 22 June letter to insurance CEOs, PRA director David Rule noted that most firms that took part in a recent market-monitoring exercise “had concerns about changing distribution channels”.

Worries included higher commissions, difficulties in exposure management and the implications of moving from case to portfolio pricing, he noted.

“Views differed as to whether broker-insurer facilities were significantly increasing acquisition costs. Some firms stated that increased commissions could be offset by a reduction in their own claims administration,” he wrote.

“However, a common point of feedback was the importance of managing the potential for conflicts of interest and transparency of commission arrangements. Several firms mentioned increases in different types of commission and fee arrangements that could be perceived as going against the benefit of the insured.”

Rule said that the PRA survey found that the Lloyd’s market is expecting the decline in open market placement and growth of delegated underwriting to continue.

He noted that a company’s distribution strategy is a “commercial decision, but it may have an impact on a firm’s ability to monitor, manage and assess risks”.

The regulator continued: “This is an area we will seek to understand in more depth as part of our ongoing reviews into the underwriting and exposure management of a number of firms in the London market.”

The PRA’s work on the area, which was revealed earlier this month by this publication, marks a change from a previous more laissez-faire approach to carriers’ arrangements with brokers.

The underwriting and exposure management review is one of several initiatives detailed in Rule’s letter.

The regulator is working with large carriers and zeroing in on a select number of lines of business.

Rule said the PRA is also looking at the impact on those firms of broker facilities, MGAs and other delegated underwriting arrangements in which they participate.

In these cases, “we will be assessing how they ensure that they understand the impact of business written on their overall risk profile and their results”, he wrote.

The PRA is also conducting a thematic review of distribution practices across smaller Lloyd’s managing agents.

This publication reported earlier this month that the PRA’s work on facilities and other underwriting practices will feed into separate studies the Financial Conduct Authority (FCA) is conducting on value in the insurance distribution chain and the wholesale insurance market, which are due to end in the business year beginning April 2018.

Facilities and rising acquisition costs are also expected to be one of the areas of the FCA’s focus.

The UK’s Prudential Regulation Authority (PRA) has unveiled strict criteria governing the way that general insurers will be required to calculate their technical provisions and internal models under the incoming Solvency II capital regime.

In a supervisory statement published on 25 April, the PRA set out requirements to complement those outlined in the European Union’s Solvency II directive, which is due to take effect on 1 January 2016.

The statement said that firms should calculate technical provisions using realistic assumptions and adequate methods.

It added that they should take events not included in data into account when calculating technical provisions, and that increasing the percentage of technical provision without justification was not appropriate.

The statement also said internal mathematical models used to calculate capital requirements should cover all material risks to which an insurer is exposed.

Because a third party model might have an impact on a firm’s internal model, third party models and data should meet the same standards.

For instance, in situations where a firm acquires catastrophe risk event loss tables from a third party, the model that produced the tables should be compliant as well as the tables.

On 17 March, the PRA released a consultation paper on a draft version of the statement, giving firms until 14 April to respond to its contents.

The regulator said it received a total of seven responses to the paper, largely requesting clearer wording or further information on specific points, and only made changes where it felt clarity would be improved.

Although some respondents found expectations in certain areas to be “overly burdensome”, the PRA said that these expectations were derived directly from Solvency II requirements.

According to accountants PwC, the consultation paper “raised the bar for justification of a number of simplifications currently used by general insurers”, although it said well-prepared firms would be able to cope.

PwC added that although the statement was helpful, it was not comprehensive, as topics such as contract boundaries were not covered.