(Bloomberg) -- The London insurance market shouldn’t keepcutting rates to secure business because it may not be adequatelypricing the risk it is taking on, the Bank of England said.
|10 years of falling prices
The key challenge for the industry, which has endured 10 years offalling prices, is to avoid “the winner’s curse of underpricing,”David Rule, the Prudential Regulation Authority’s new executivedirector of insurance supervision, said in a speech in Dublin. “ThePRA is a not a price regulator, but we are concerned to see thatfirms are adequately managing their exposures.”
Lloyd’s of London Chairman John Nelson said earlier this monththat insurers should target broker fees rather thanpricing to reduce costs, as the industry struggles withrecord-low interest rates, increased competition from alternativecapital providers and declining investment returns. Pressure oninsurers to win new business had resulted in higher commissions forthe brokers, Rule said Wednesday.
|“We expect boards to be relentlessly inquisitive inunderstanding and challenging the effectiveness of underwritingcontrols,” Rule said at a general-insurance conference in Dublin.“Fundamentally, the board should seek evidence that underwritersare maintaining appropriate discipline.”
|Level of reserve releases
The regulator also warned against insurers using money set asidefor claims in previous year to boost profitability and cushion theimpact from price declines and lower investment income. The levelof reserve releases is now at the highest level in 30 years, theregulator said.
“Our obvious concern is that these should reflect genuinereserve redundancy with the decisions taken by risk managers andactuaries using their best professional judgment and not in any wayinfluenced by a desire to sustain reported profits,” Rule said.
|In one “extreme case”, the regulator estimated that an insurer’sbooked reserves implied an inflation assumption for future claimsof negative 2 percent compared with the regulator’s estimate of 5percent per annum inflation in the past.
|Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.
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