Moves to hand the Bank of England fresh powers over insurers will not be enough to offset the risks posed by looser regulation, one of the central bank’s most senior officials has warned.
The comments by the chief executive of the Bank’s regulatory arm, Sam Woods, come a day after his boss and the Bank of England governor, Andrew Bailey, said that reforms to so-called Solvency II regulations would increase the possibility of life insurance firms failing by 20% in a given year.
Firms like Aviva and Legal & General claim the reforms will release hundreds of billions of pounds for big investments like infrastructure projects, by reducing the amount of capital they have to hold to prove they can pay policyholders in the long term.
The Treasury and BoE have disagreed over the potential risks of Solvency II reforms, which the Conservative government hopes will accelerate the levelling up agenda across the UK.
Woods told MPs on Tuesday that the government was offering the Bank “additional powers” to oversee the insurance sector, including additional stress testing – which measures how firms would fare during a severe market downturn – and requiring senior managers to personally vouch for the fact that the firm is holding enough capital against risks on their balance sheets.
However, Woods said it did not make up for increased risks the planned reforms pose.
“The government has committed … to give us some additional powers to help us manage risks in the insurance sector,” Woods told the Treasury select committee, adding: “What I would say though, is that we do not think we either should, or can, use those to achieve the same effect, as we were looking for through a reform of the fundamentals.”
However, Woods told the committee he did not feel strongly enough about the risks to suggest that MPs vote against Solvency II changes, and was at no point considering resigning from his post over the issue.
MPs also pushed Woods over plans to reform the UK ring-fencing regime, which was introduced in the wake of the 2008 financial crisis and forces banks to separate, and protect, customer deposits from their investment banking activities.
Some lenders argue that the rules are no longer necessary, because other regulations are in place to ensure the banks themselves could afford to go bust in an orderly way, without relying on taxpayer bailouts that would ultimately protect customers and the wider economy. Woods said that while he welcomed some reforms, scrapping ringfencing entirely could put taxpayer money at risk.
The committee also asked whether the Bank was concerned over the potential impact of the climate crisis on the mortgage market, including cases where lenders may refuse to offer home loans in areas at a greater risk of flooding due to more extreme weather events.
Woods speculated that the government could be forced to intervene in a similar way to the cladding crisis. “We’ve had a live example of this quite recently with cladding … where a lot of people are kind of trapped.
“If the effect of climate change or other things meant that you had parts of the country, that as a matter of wider government policy, we want to be inhabited but which could not get funding for from banks, or could not get insured, then I think that would be a question for the government to look into,” he said.
Woods’ comments came as another senior Bank official warned that UK companies could be exploiting the cost of living crisis to push through inflation-busting price increases – a phenomenon widely known as “greedflation”.
Catherine Mann, one of the nine members of Threadneedle Street’s monetary policy committee, told Bloomberg in an interview published on Tuesday she was concerned about the ability of firms to take advantage of consumer willingness to tolerate higher prices.
Her comments reflect growing anxiety about the risk posed by corporate greedflation – although she did not use the specific word. The European Central Bank expressed similar concerns last week.
