Insurers in the UK should not keep cutting rates to win business because they may not be sufficiently pricing the risk that they are taking on, the Bank of England has warned.
David Rule, the new executive director of insurance supervision at the Prudential Regulation Authority (PRA), said that the key challenge for insurers is how to preserve or even grow activities while avoiding the “winner’s curse” of under-pricing in order to get business.
“The PRA is a not a price-regulator,” Rule said
in a speech in Dublin, Ireland. “But we are concerned to see that firms are adequately managing their exposures – that they can identify and quantify the risks being covered, manage and control overall exposures, and estimate likely claims costs under different loss scenarios.”
According to
Bloomberg, the financial watchdog also warned insurance firms against propping up profits by using money set aside for claims in the previous year.
“Our obvious concern is that these should reflect genuine reserve redundancy with the decisions taken by risk managers and actuaries using their best professional judgement and not in any way influenced by a desire to sustain reported profits,” Rule said.
He said reserve releases have reached the highest level in 30 years.
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