UK Regulator Warns Insurers on Eroding Reserves

The UK’s banking and insurance regulator has warned motor and home insurers about the risks of drawing on the reserves they have accumulated against future claims to boost profits.

In a letter to insurance chief executives dated 13 November, a copy of which was seen by news agency Reuters, the Prudential Regulation Authority (PRA) said that prevailing competitive pressure in the UK insurance market, added to low returns from investing insurance premiums, has encouraged some insurers to release reserves from previous years to help their annual performance. This left them at risk of having insufficient reserves should market conditions worsen.

“The PRA will question the robustness of the underwriting practices at firms that rely unduly on prior year reserve releases to support ongoing underwriting activity for any substantial period of time,” Chris Moulder, director for general insurance, wrote in the letter.

The regulator added that “firms should stand ready to demonstrate the robustness of their reserving governance frameworks” as part of “regular supervisory interactions”.

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