Stop Cutting Prices, Bank of England Warns Insurers

The London insurance market should not keep cutting prices to secure business because low interest rates mean investment earnings can no longer cushion poor underwriting, the Bank of England said.

The key challenge for the industry, which has endured 10 years of falling prices, is to avoid “the winner’s curse of underpricing,” David Rule, the Prudential Regulation Authority’s new executive director of insurance supervision, said in a speech in Dublin. “The PRA is a not a price regulator, but we are concerned to see that firms are adequately managing their exposures.”

The regulator also warned against insurers using money set aside for insurance claims in previous year to boost profitability. The industry has been releasing reserves for past claims, which has helped cushion against both the impact of the price declines and falling investment income from ultra-low yields. Reserve releases in general insurance are now at their highest level in 30 years, the regulator said.

Lloyd’s of London Chairman John Nelson said earlier this month that insurers should target broker fees rather than pricing to reduce costs, as the industry struggles with record-low interest rates, increased competition from alternative capital providers and declining investment returns. Pressure on insurers to win new business had resulted in higher commissions for the brokers, Rule said Wednesday.

“Our obvious concern is that these should reflect genuine reserve redundancy with the decisions taken by risk managers and actuaries using their best professional judgment and not in any way influenced by a desire to sustain reported profits,” Rule said.

In one “extreme case”, the regulator estimated that an insurer’s booked reserves implied an inflation assumption for future claims of negative 2 percent compared with the regulator’s estimate of 5 percent per annum inflation in the past.

Topics Carriers