New insurance supervision outlined
The protection of insurance policyholders will be a priority for the new Prudential Regulation Authority (PRA), it has been announced.
The PRA will take over the supervision of financial institutions from the Financial Services Authority (FSA) by the end of 2012.
The Bank of England and the FSA say under the new regime, insurers will still be allowed to fail if insolvent.
But the PRA will aim be to minimise the impact on the financial system.
"The PRA's role will be to ensure there is a reasonably high probability that an insurer is able to meet claims from, and material obligations to, policyholders as they fall due," the Bank and the FSA said.
"And to make sure that where an insurer is unable to meet such claims and obligations, the adverse consequences for policyholders are minimised by ensuring that the insurer fails in an orderly manner."
The new authority will regulate 1,094 insurers in the UK as well as the country's banks.
The PRA will be report to the new Financial Policy Committee of the Bank of England, whose job will be to ensure the stability of the UK's financial system.
Last month Hector Sants, the incoming head of the PRA and the current boss of the FSA, warned that banks in the UK would be much more strictly regulated than they had been before.
Insurers in the UK have already been under the close scrutiny of regulators for most of the past decade and were largely undamaged by the financial and banking crisis of 2007-08.
All firms under the new regime will be subjected to the same "base line" level of supervision and regulation to ensure they have enough money and sufficient reserves to meet claims and pay out on investment policies.
"While insurers are not systemic in the same way as banks, their behaviour or failure nevertheless has the potential to pose risk to the stability of the financial system," the Bank and the FSA said.
"When insurance is combined with banking in a single group (as is the case for many of the largest UK banks) that may give rise to system-wide risk if the failure of the insurer threatens the financial condition of the bank," the regulators added.
The PRA will not wait for disaster to strike before acting.
It says it will use its powers to interfere directly in the management of a firm if it thinks this is needed to stop an insurer's finances deteriorating and putting the business at risk.
As well as directing management action, the PRA will be able to restrict a firm's ability to operate, impose fines or even go to court to prosecute a firm or individual who refuses to stop acting in a risky manner.
The regulators also said they would not tolerate attempts by insurers to pull the wool over their eyes.
"The PRA will expect the firms it regulates not to engage in 'creative' compliance with its rules and policies and not to engage in regulatory arbitrage designed to mask the riskiness of their activities or financial exposures," the Bank and FSA said.
The PRA will pay most attention to the biggest insurers, whose failure would pose the greatest threat of disrupting the UK financial system, to try to make sure they do not take disastrous risks.
Among them are Aviva, Legal & General, Prudential, Old Mutual, Standard Life, Lloyds banking group, as well as Lloyds of London.