BoE’s Mark Carney warns on re/insurer investment strategies

Governor of the Bank of England Mark Carney warned that insurers need to be accountable for their actions today and that the Bank of England is watchful of any risks from moves such as insurers or reinsurers adopting more aggressive investment strategies.

In a piece written for the UK newspaper the Times, Mark Carney said that the Bank of England will treat regulation of insurance and reinsurance firms in much the same way as it treats that of banks. The Bank of England is aware of the difficult macroeconomic environment faced by insurers and reinsurers and remains vigilant to any risks that emerge as re/insurers seek to improve the viability of their businesses.

Carney notes that the macroeconomic environment, particularly the prolonged low-interest rate situation, makes some traditional insurance business less viable. On top of this insurers and reinsurers face regulatory and legislative challenges that can at times threaten their traditional business model, Carney wrote.

Challenges such as these could lead insurers and reinsurers to explore new avenues to boost profits, such as entering new lines of business, looking to opportunities in emerging markets, or adjusting their investment strategies to look to less traditional asset classes and asset types.

Carney wrote; “This is not necessarily a problem, but the Bank of England, which now supervises Britain’s insurance companies, will be vigilant to the risks in any such moves. If we think that managements’ actions today pose a risk tomorrow, we won’t hesitate to step in.”

Carney explained that the Bank of England will create a regime which will hold senior managers in the insurance industry to account for any issues occurring in the insurance and reinsurance industry, in much the same way as the Bank has been asked to for the banking sector.

It’s interesting and perhaps timely that Carney mentions insurer and reinsurers growing desire to change their strategy on the asset-side, as they seek to boost returns for shareholders. This is something we’ve been writing about, as led by the hedge fund or asset manager backed reinsurers others in the sector are expressing a desire to move towards more active or aggressive investment strategies.

We wrote just the other day that the increasing focus on more aggressive investment strategies, at reinsurers who are seeking to boost their total return while premium rates soften, could result in greater scrutiny on the sector. The Bank of England seems to already be aware of the trend towards higher risk investments at re/insurers and we would expect is likely to follow it closely as it develops. This could result in greater scrutiny of hedge fund or asset manager backed re/insurers too.

As with all regulatory oversight and scrutiny, this is no bad thing. It is important to ensure that those insurers or reinsurers that do embrace more active or aggressive investment strategies, do so with the duration of their liabilities in mind to ensure no mis-match of assets to liabilities occurs.

It’s also healthy to have a regime in place where executives are held to account when things go wrong. This is healthy for the banking sector and will be healthy for the UK insurance and reinsurance sector too.