The Bank of England is to clamp down on insurance companies by subjecting their bosses to tougher scrutiny and forcing them to take steps to bolster their financial strength, Mark Carney has warned.
The governor of the Bank of England also warned on Thursday about the potential for risks building up in the financial system after more than five years with the base rate at a historic low of 0.5% – even as he repeated that the moment rates will rise was getting closer.
Pointing out that the weaknesses of insurers such as AIG were exposed during the 2008 banking crisis, Carney told the insurance industry that “the people running insurance companies should be more clearly held accountable for their actions”.
The Banks regulation arm, the Prudential Regulation Authority, is responsible for regulating insurers as well as big banks and one-third of its staff are involved in overseeing the insurance sector.
Carney said the regulator was on alert for any attempts by insurance companies to try to cut the amount of capital they hold and underestimate the size of the risks they are running. Referring to rules that allow insurers to use their own financial models to calculate the risks they run, Carney said the bank had learnt the lessons of the banking crisis when banks were allowed to run on lower capital as they measured their own risks.
“The dangers of using poorly designed models were made all too clear in the banking sector. So the Bank won’t hesitate to withhold approval of inadequate or opaque models,” the governor said.
“Models must be based on appropriate data and account for all quantifiable risks. Boards have the responsibility to ensure models remain appropriate and to show they are used in practice,” Carney said.
Carney said he did not expect to subject insurance companies to the same regime as bankers, who, if wrongdoing emerges, have to prove they had tried to stop it. A consultation will begin later this year to make insurance company chairmen, chief executives and risk officers and their actuaries “directly accountable for how a firm is run, for their decisions and for their actions”.
“These senior people will be expected to prove their fitness to regulators before they take up a role and the onus will be on them to ensure risks are understood, measured and properly considered,” Carney said.
In a speech to actuaries, he also discussed the economy and the potential for a rate rise. “With many of the conditions for the economy to normalise now met, the point at which interest rates also begin to normalise is getting closer. In recent months the judgement about precisely when to raise the bank rate has become more balanced,” he said.
The market expects rates to start rising from February next year.
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