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RPT-Fitch: BoE Underlines Growing Regulatory Scrutiny of UK Insurers
May 23, 2014 / 8:37 AM / 3 years ago

RPT-Fitch: BoE Underlines Growing Regulatory Scrutiny of UK Insurers

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May 23 (Reuters) - (The following statement was released by the rating agency)

Bank of England governor Mark Carney's plan to introduce accountability rules for senior insurance industry executives underlines Fitch Ratings' view that the UK has stepped up its regulatory focus on the sector, adding to the risk of further potentially disruptive reform.

It is too early to assess the likely impact of accountability rules. They will probably increase the overall regulatory burden, but there could also be a negative impact if they deter people from accepting senior insurance roles, or benefits if they result in closer scrutiny of risk by senior managers. Carney highlighted the plan in an article for "The Times", in which he also said the Bank of England "won't hesitate to step in" if it believes management action could pose a risk.

Other recent UK regulatory and legislative changes are more clearly negative for profitability, particularly among life insurers. We revised the UK life insurance sector outlook to negative from stable at end-March following the announcement of three initiatives. These were the scrapping of rules requiring retirees to buy an annuity, the introduction of a 0.75% cap on charges for pension auto-enrolment default funds, and a Financial Conduct Authority investigation into whether insurers are managing business in closed funds in customers' best interests.

The combined effects of these changes will put increased strain on profitability, which is already a relative weakness for the UK life sector. This is because insurance companies are competing for business in a highly regulated, saturated market, while low interest rates are pushing investment returns down. But we still consider rated UK life insurers' capital positions strong - an important factor underpinning their credit ratings.

Regulatory reform could also put pressure on profitability in the non-life sector, particularly for motor insurance, but the impact is likely to be more mixed. Reviews by the Financial Conduct Authority and the Competition Commission could put restrictions on the sale of add-on products, such as legal cover and breakdown cover, which are big profit contributors for motor insurers. But regulations to tackle claims inflation are cutting the frequency of lower-cost bodily injury claims, even if the benefit is mainly accruing to customers through lower premiums, rather than helping boost profitability.

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