A TOP Bank of England official hit out at European insurance regulations yesterday, saying the new rules may overwhelm regulators and fail to cut down risks in the industry.
Paul Tucker, deputy governor for financial stability, said the Bank is “dismayed by how much it is costing the industry and the regulator to adapt to Solvency II,” and warned “it risks being too complicated in its desire to introduce a ‘risk sensitive’ regime”.
He expressed worries insurers may become risky “shadow banks”, engaging in poorly supervised activities.
The insurers can raise funds by lending securities like shares to financial institutions, and then invest the earnings in higher-yielding assets.
These are “essential” to the workings of capital markets, he said, but warned they lack transparency and structure.
Like banks, they may borrow short-term and lend long-term, leaving them vulnerable to a run if creditors doubt the firm can honour its obligations – as happened to AIG, bringing down the insurance giant in 2008.
One solution may be to make insurers hold more capital, he suggested, to make sure policyholders are well protected.