BoE warns insurers over ability to sell down assets in a crisis

Life insurers may very well be overly optimistic about their skill to promote down property in a disaster, the Financial institution of England has warned.

The BoE’s Prudential Regulation Authority, which supervises the sector, put 16 life insurers by a stress take a look at of credit score downgrades and elevated longevity. In outcomes printed on Monday, it discovered them resilient, but it surely mentioned their assumptions for the way shortly they might promote down property following a disaster “may very well be optimistic”. 

A number of relied on their skill to promote bonds that had been downgraded to junk, with £8bn to £9bn of such property anticipated to be offloaded. Most assumed this may very well be executed inside six to 12 months of the occasion.

“In mild of the combination discovering, this may very well be optimistic, particularly as different traders would even be taking related actions,” the PRA mentioned. “It will be important that, when corporations plan for the administration actions that they might soak up stress, they permit for market liquidity and potential stress amplification arising from actions taken by different traders.”

An instance of such a rush for the exit was offered in final yr’s gilts market disaster, when pension funds struggled to dump authorities debt shortly sufficient to fulfill collateral calls and the BoE was pressured to intervene.

For basic insurers, the regulator recognized areas for enchancment in how they quantify losses corresponding to so-called secondary perils — occasions corresponding to floods which have traditionally been less expensive, however are rising in frequency.

For cyber dangers, it discovered that insurers’ evaluation of the probability of tail dangers had been “extremely variable” and that there have been “challenges and sensitivities” in the usage of exclusions for state-sponsored assaults. Such exclusions have sparked fierce debate within the sector and a flurry of authorized instances.