Capital Rules For Insurers Could Toughen After Coronavirus

By Lucia Osborne-Crowley
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Law360, London (May 22, 2020, 4:48 PM BST) -- A senior British regulator has suggested that insurers could be asked to maintain higher capital reserves during periods of calm in financial markets to prepare for crises such as the COVID-19 pandemic.

Charlotte Gerken, co-leader of the insurance directorate at the Bank of England, said the coronavirus outbreak could prompt regulators to consider toughening capital requirements in the Solvency II Directive, an EU regime that aims to protect insurers against financial crashes, after the Britain leaves the bloc.

Gerken said the central bank will "learn a lot from this crisis."

"These lessons are helpful when it comes to thinking about the future U.K. regulatory landscape," she added in a speech published Friday.

Gerken said one possible regulatory change to emerge from the COVID-19 pandemic, which has hit economies and spooked markets, could be to require insurers "to hold additional regulatory capital during more benign times."

This additional money would serve as "buffers which the [Prudential Regulation Authority] could then allow to be released during a market down-turn," she said.

The speech was a reflection on how domestic regulators might adapt rules governing the insurance industry once the solvency regime ceases to apply at the end of the Brexit withdrawal period. Gerken noted that the COVID-19 pandemic has drawn attention away from long-term planning toward crisis management.

But Gerken said the BoE is looking ahead to the regulatory landscape after Brexit.

Gerken added that the tough capital requirements in Solvency II, which was introduced in 2016, meant that British insurers were well-prepared for the COVID-19 crisis.

"The information we have from the largest U.K. insurers shows the industry was well-capitalized going into this," Gerken said, adding that the sector's aggregate solvency ratio is around 150%.

Britain's insurers will have to take a leading role in the economy's recovery from the pandemic, Gerken continued.

"None of us knows how the full effects of the coronavirus pandemic will unfold," she said, adding that the BoE's goal is to "build a bridge across the economic disruption created by the pandemic and help U.K. businesses, consumers and the financial sector to the other side."

"Insurers will need to be on the front foot in identifying the potential impacts on their longer-term business models in order to meet changing customer expectations," Gerken said.

Insurers have received praise and criticism for their handling of the pandemic.

The main trade association for British insurers said Friday that the industry is taking action to support consumers facing financial difficulty in response to a call from the Financial Conduct Authority.

But the finance watchdog plans to take a sample of disputed policy wordings to the High Court as it seeks to gain an authoritative judgment on liability, in a battle over business interruption insurance policies.

--Additional reporting by Martin Croucher. Editing by Ed Harris.

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