Summit News: Regulators focus on recession risks
REGULATORS are turning their focus on to insurers and reinsurers’ management of ‘recession related risks,’ as a top priority, said a senior figure at the Financial Services Authority.
Tony Brooke-Taylor head of department wholesale insurance at the FSA told the Insurance Day Summit London that “a recovery looked a long way off”.
The regulator was scrutinising how businesses dealt with an array of such risks, ranging from investment losses to currency volatility.
Brooke-Taylor said that it was hard to reconcile “aggressive growth plans in the current economic climate”.
In recent months a number of London firms had launched capital raisings to exploit improving market conditions, although others had decided not to deploy capital, he noted.
“While the cost of capital for general insurers and reinsurers is relatively cheap at the moment, I would remind the audience to be aware of the contribution that cheap finance played in the credit boom,” he warned.
Brooke-Taylor added that while underwriting results had been ‘mixed’ over the last year, investment returns were uniformly down. And they were unlikely to contribute to the bottom line in the near future, he said.
In such a climate companies needed to be vigilant against the temptation to pursue market share aggressively. A loss of pricing discipline could impact badly on their finances, he said.
Brooke Taylor added that a tendency for insurers to increase retentions in the face of hardening reinsurance prices was a ”legitimate shift in risk appetite”.
But such companies should ensure they had appropriate mitigation such as solvency capital in place.
Insurers and reinsurers should also brace for the impact of currency fluctuations.
“A business with significant currency mismatches in the balance sheet of profit or loss must be prepared for shifts,” said Brooke-Taylor.
Claims in a downturn would increase but he warned that insurers/reinsurers should be careful not to ”underplay this”.
In addition Brooke-Taylor said that stress testing of reinsurers business models was vital. In particular “reverse stress testing” where firms consider scenarios when a business model became unviable, should be carried out.
“We know there are shock events that can damage the market. Even if the London market is more resilient then in the 1980s, improvements must keep pace with market evolution.”
