The Bank of England (BoE) plans to scrutinise whether insurers are taking on too much risk by investing in infrastructure projects, which may be unsuitable for traditional portfolio management.
These infrastructure investments can be attractive to insurers, but present “idiosyncratic risks” unsuited to traditional portfolio level management alone, said Andrew Bulley, director of life insurance at the BoE’s supervisory arm, the Prudential Regulation Authority (PRA).
The European Union’s (EU) Solvency II regime that come into force in January 2016 will help the insurance sector judge whether to invest in infrastructure, Bulley said in a speech in London.
Any suggestion that insurers should not invest in such projects could undermine a €315bn (£227bn) European Commission (EC) plan for loans to infrastructure and small businesses.
Bulley said the PRA was “neutral” on whether insurers should increase their exposure to infrastructure projects, but said: “We shall continue to review the evidence as the new regime beds down.”
European insurers have been encouraged by policymakers to invest in economic growth through projects to develop new roads, bridges and telecoms networks, which can offer higher yields than government bonds.
Legal & General, for example, has allocated £1.5bn (US$2.3bn) to a UK infrastructure fund and is seeking external financing to expand the fund tenfold.
Bulley also spelled out what board members should know about the new models insurers will use, vetted by regulators, to calculate capital requirements under the EU rules, known as Solvency II.
Regulators want board members to be more accountable for what goes on in the company.
“In general, we would expect executives to have a more detailed understanding than non-executives, and we look to the executives to ensure that their non-executive colleagues are adequately trained and informed about all aspects of the model,” Bulley said.
Chairs and members of an insurer’s risk and audit committees should have a more detailed understanding of Solvency II models than other board members.
“But we would expect all board members, both individually and as a collective unit, to be rigorously inquisitive, critical and challenging of the model, regularly questioning the outputs,” Bulley added.
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