Bank of England fires warning at insurers

In a speech at the General Insurance Research Organisation conference in Dublin, David Rule, Bank of England executive director of insurance supervision since July, said that the Prudential Regulation Authority (PRA) is concerned that general insurance firms may not be adequately managing their exposures.

Rule said that the key challenge for insurers is how to preserve or even grow their activities while avoiding under-pricing in order to get the business. He questioned if insurers are adequately managing their exposures, if they can identify and quantify the risks being covered, manage and control overall exposures, and estimate likely claims costs under different loss scenarios.

He repeated the points made earlier this year by his colleague Chris Moulder, director of general insurance at Bank of England.

Regarding underwriting, Rule expects boards to be relentlessly inquisitive in understanding and challenging the effectiveness of underwriting controls, pricing trends, exposure changes and rate adequacy in order to make informed decisions, and provide meaningful challenge, to the business.

The boards should seek evidence that underwriters are maintaining appropriate discipline. Regarding reserving: a robust approach to the setting of reserves and appropriate and adequate oversight of the reserving process is vital, Rule said.

“We expect boards to demonstrate independent challenge of key issues, material uncertainties and significant assumptions in the reserves and the rationale for their choice of booked reserves,” Rule said.

The obvious concern is that reserve releases should reflect genuine reserve redundancy with the decisions taken by risk managers and actuaries using their best professional judgement and not in any way influenced by a desire to sustain reported profits, he noted.

"Our calculations suggest reserve releases have in some cases got to a point where implied future claims inflation looks very low. In an extreme case, we estimated past claims inflation for the class of business to be 5 percent per annum, whereas to obtain the particular insurer’s booked reserves would imply a future claims inflation assumption of -2 percent. If the future trend is in fact in line with past inflation, booked reserves would need to be 25% higher than currently assumed," Rule said hin the speech.

On reinsurance, Rule expects boards to ensure that the economic impact of the reinsurance transaction is appropriately reflected in business plans, capital setting and reserving; and to be alive to the wider risks to which reinsurance placements can give rise. On capital, Rule expects boards to ensure that firms assessment of risk and capital requirements remain valid in this challenging trading environment with a soft market and low interest rates.

“We all know that running an internal model is not just a one-off task, and there is a need for firms to continue to refine the models in the light of experience and as new data becomes available. As regulators, we need to be alive to the risk that when firms select the areas where change is required, and as internal models are updated, there is not some inherent bias towards changes which reduce the firm’s capital requirement, at the expense of areas of the model which might be insufficient,” Rule said.