The Bank of England has warned that a much-heralded overhaul to insurance rules “increases risk” and could result in a corporate failure that ultimately hits the public purse.
Andrew Bailey, the central bank’s governor, and Sam Woods, head of its Prudential Regulation Authority, said proposed relaxations to insurance regulations increased the risk that a pension provider runs out of capital to back their promises, citing past scandals such as Equitable Life.
Woods said the overall reform package “increases risk”, and that was a “trade-off” made by the government.
“The way it comes home to roost is if there is not enough capital backing pensions,” he told the Treasury select committee.
“I would say it is highly likely that comes back to the public purse if that occurs,” Woods added. But he stopped short of calling for MPs to vote against the plans as they pass through parliament.
The regulatory chiefs agreed to go away to quantify this extra risk created by the Solvency II reforms, which the government has said will lead to insurers redirecting tens of billions of pounds into the real economy.
Woods also cited concerns from some insurance executives that new powers granted to the regulator will be used to go via the “backdoor” to achieve its aims. “I don’t think we should or we can use those tools to reverse-engineer the same effect that we were trying to get.”
Bailey rejected the suggestion that the BoE traded a more radical approach to Solvency II in order to have controversial call-in powers quashed.
“We did not trade Solvency II for the call-in power,” Bailey said, adding that he could not remember both topics coming up in the same meeting.