Regulators have warned UK insurers that their capital models might be underestimating the risks they face.
David Rule, head of insurance supervision at the Prudential Regulation Authority (PRA), said that he would be “watching carefully” for signs of whether the insurers’ capital models were diverging too far from the underlying risks.
Mr Rule was speaking at a seminar organised by the Association of British Insurers.
Most insurers use what is called a “standard formula”, where the parameters are preset, to calculate their capital needs. But some, including most of the UK’s biggest insurers, use their own internal models.
Mr Rule said that he was concerned that the capital requirements being generated by UK life insurers’ internal models were diverging too much from the requirements being generated by the standard formula.
He added that the PRA was “not yet ringing the alarm bells”, partly because it only had two years’ of data and partly because some of the difference could be explained by changes to the insurers’ business models.
However he warned: “The significant reduction in internal model capital compared to the standard formula is not a trend we would expect to continue over time. We will be watching it carefully.”
Mr Rule also criticised some insurers for being “inconsistent and insufficiently rigorous in their approach” when it comes to predicting what action they might be able to take in the future when faced with problems.
“Good practice is to bring all future management actions together into a single document that, at least at a high level, the board can review,” he said.