Select Page

PRA Business Plan 2018/19

As regulated firms continue to adapt their business models in response to competitive forces, the Prudential Regulation Authority (PRA) set out its strategy over the medium to long term in the Business Plan 2018/19.  The plan highlighted a number of areas where firms business models and the effects they have on firm’s safety and soundness will be monitored closely particularly:

  • Changes in the behaviour or structure of firms that seek to take advantage of regulatory arbitrage
  • New firms seeking authorisation to operate in the United Kingdom, following the restructuring of existing firms and groups, or others who seek authorisation as they take advantage of digital technologies

Changes to business models may have arisen as a result of regulation, the search for profitability in a low interest rate environment, and wider issues such as EU withdrawal. The PRA will continue to conduct Business Model Analysis and reviews of capital management.

In March 2017, the Government sent the Prudential Regulation Council (PRC) its first recommendation letter about aspects of the Government’s economic policy to which the PRC should have regard when considering how to advance its objectives.  The letter indicated that the Government was keen to see more competition in all sectors of the financial services industry, including minimising barriers to entry, ensuring a diversity of business models and burdens are proportionate.

PRA approach to insurance supervision

In October 2018, the PRA published its approach to insurance supervision, and specifically how Business Model Analysis forms part of its supervisory approach.  In essence, the analysis includes an assessment of where and how a firm makes money, and the risks it takes. Threats to the viability of a firm’s business model, and the ways in which adverse effects on other participants could be created are examined.

For those firms who may pose a greater risk to the stability of the financial system, the analysis may include:

  • a review of the drivers of profitability
  • risk appetite
  • performance targets and underlying assumptions
  • forecasts and their plausibility

The PRA uses this analysis to form a projection of the firms ability to achieve its business and capital plans and associated risks over the medium term.  This analysis and the qualitative judgments of supervisors, guide the PRA’s work in assessing the adequacy of management actions.

The PRA is clear in stating ‘If we believe that mitigating measures alone cannot adequately reduce material risks to safety and soundness and policyholder protection, the insurer will be required to change its plans‘.  The PRA has a variety of formal powers under statute that can be used to intervene directly in a firm’s business.  For example, varying a firm’s permission or imposing a requirement to prevent or curtail a firm from undertaking certain regulated activities, that may require a change in business model or future strategy.

Cass Business School – Business Model and Technology Centre

Cass Business School has set up the Business and Technology Centre https://www.cass.city.ac.uk/faculties-and-research/centres/business-models-technology to lead an international team to further research in this important area.

Cass Executive Education https://www.cass.city.ac.uk/study/executive-education provide open and tailored programmes to help corporate organisations consider the risks and opportunities of business model innovation and diversification.  The aim of these practical programmes are to guide executives through a strategic analysis of their current business model, in order to identify a focused selection of high potential opportunities that could boost performance.

Day 1 (half day)

Business model identification and classification: an exercise to correctly define the firm’s business model and its strategic positioning in relation to competitors. 
Topics covered:
  • Strategy and Business models: definition and strategic alignment
  • Business model as cognitive tools: the importance of communication
  • Classifying your business model: why it matters?
  • An exercise to correctly classify your business model for strategic purposes
  • Competitive analysis via business models

Day 2 (half day)

Business model change: A creative exercise to identify a large set of options to innovate the business model 
Topics covered:
  • Business model innovation vs product innovation: differences and mutual influences
  • Business model innovation: how to master it in the physical and digital world
  • Business model change: an exercise to innovate your business model
  • Using the business model operators: A structured group brainstorming to choose a limited selection of high-potential business model innovations

Day 3 (half day)

Business model diversification: A discussion on the mechanisms of complementarity and substitution that the new business models will have with the current ones, and how to achieve business model portfolio optimisation. 
Topics covered:
  • What is business model diversification?
  • How to track the portfolio of business models in your company
  • Supply-side and demand-side complementarities: what are they and how they can be leveraged?
  • Business model implementation and monitoring: The creation of an essential strategic plan to execute the selected business model innovations
  • How to maintain and improve your portfolio

Summary

Iconic companies including Airbnb, Amazon, Apple, Google, PayPal, Netflix and Tesla have all pioneered innovative business models, that are disrupting established markets.  By setting out the key drivers of competitive advantage, and how to reduce risk and maximise synergies through business model innovation and diversification, firms will be well placed to engage with the PRA when they complete an analysis of a firms business model.

 

Reciproco provides knowledge integration across risk, solvency and strategy, including digital transformation, leading complex and unique projects in regulated sectors. Helping senior executives and management teams focus on strategic challenges to create a competitive advantage.

Darren Munday is the founder and Managing Director of Reciproco. An experienced executive with over 20 years’ global experience with multinational companies, including Chief Risk Officer reporting to the Board.

Darren is an Honorary Visiting Fellow of the Digital Leadership Research Centre, Cass Business School where he also holds an Executive MBA.  Darren is a Certified Fellow of the Institute of Risk Management (CFIRM) and Chartered Insurance Risk Manager (ACII) of the Chartered Insurance Institute.


All rights reserved. Unauthorised use and/or duplication of this material without express written authorisation from Darren Munday is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Darren Munday with appropriate and specific direction to the original author and content.