In a speech this afternoon, Carney indicated regulators will come down hard on insurance companies that give a distorted view of risk to decrease the amount of capital they are expected to hold.
A new regime, known as "Solvency II", will usher in new standards for the industry including the requirement that financial institutions hold greater capital reserves.
The Bank's Prudential Regulation Authority is responsible for supervising insurers and ensuring the stability of their role in the financial system.
Models not meeting the Bank's standards will have approval withheld, Carney said:
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.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 also indicated systemic insurers - companies with intrinsic links to the financial system- will be held to higher standards. AIG's floundering in the depths of the crisis highlighted the need for higher standards, he said.
Systemic insurers should be able to have their problems resolved without taxpayer intervention if they fail.
Nonetheless, given the externalities from the failure of a systemic insurer, it is of course preferable that their probability of failure is lower.That’s why systemic insurers will be subject to higher global standards.
It is now clear that in some parts of the financial sector, the link between seniority and accountability had become blurred or even severed.