In a recent article for The Times newspaper, the governor of the Bank of England has highlighted the risks insurance companies could be exposing themselves to in the current macroeconomic environment. The regulation of insurers now falls under the Bank of England’s remit since the formation of the Prudential Regulation Authority (PRA).
With low interest rates making some traditional insurance business less profitable, insurers are increasingly looking for new ways to generate returns. Mr Carney warned that the PRA would be keeping a close eye on some of these higher risk business models.
One area highlighted was investment in riskier asset classes, which could lead to problems later down the line. In recent years we have seen a gradual rise in the use of asset backed securities, high yield debt and other products, with Mr Carney clearly concerned by some of these strategies.
To help tackle this, the Bank of England will be creating a new regime to ensure top insurance executives are accountable in the same way as those running banks and building societies. There was, however, no detail on the sanctions that transgressors may face. At the same time, Carney was keen to point out that the Bank will not stand behind insurance companies who fail as a result of mismanagement.
Mr Carney was also keen to promote insurance companies as sources of long-term finance to the economy. He noted that the Bank was working with its European counterparts to help insurers enter the market for lending to businesses and infrastructure projects. The likes of Legal & General and Aviva have already made significant moves into infrastructure debt and these comments signal that further investment is being encouraged.