BoE warns insurers on temptations of tapping reserves

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LONDON, Dec (Shanghai: 600875.SS - news) 2 (Reuters) - Britain's insurers were warned by the Bank of England on Wednesday not to dip into their reserves to flatter earnings if doing so would undermine their resilience to market shocks.

The warning comes as insurers start to prepare their annual earnings statements. UK firms such as Admiral have in the past boosted profits by releasing reserves against future claims, a strategy analysts have criticised as unsustainable.

Chris Moulder, director of general insurance at the BoE (Shenzhen: 200725.SZ - news) 's Prudential Regulation Authority (PRA), said some insurers may be tempted to increase releases of reserves, rely on top line growth or purchase specific forms of reinsurance to meet business plans and market expectations of profitability.

"As regulator, the PRA has responsibility to ensure firms continue to have an adequate level of resilience to meet current and future policyholder obligations," Moulder said in a speech released by the BoE.

"We expect boards to challenge where a firm's strategy either threatens this objective, or where the strategy compromises the ability for adequate oversight."

Motor and home insurance firms set aside reserves to pay possible future claims. According to consultants Deloitte, motor insurers' reserve releases in 2014 improved their combined operating ratio - a key measure of profitability - by 10 percentage points.

The long-term average is to release sufficient reserves to improve the ratio by four percentage points, Deloitte said.

The PRA's biggest task this year has been to prepare the industry for new European Union capital adequacy rules known as Solvency II, which come into effect in January.

Moulder said as this work draws to a close, the PRA will work on other issues such as underwriting standards and setting reserves.

Insurers will have to demonstrate "strong governance" around how they set reserves, he said.

Larger firms can expect the PRA to continue to follow a cycle of external reviews of reserves, Moulder said.

The regulator was also aware that more complex reinsurance arrangements appear to be re-emerging in the market and they must have the right capital treatment, he added. (Reporting by Huw Jones; editing by Carolyn Cohn and Elaine Hardcastle)