Bank of England to gain powers to manage demise of UK large insurers

The UK government said it would start work on setting up new rules specially designed to prevent a big insurance company collapse from crashing the financial system (see US Insurers’ Investments to the Failed Banks are Modest).

The Treasury said that it would legislate “when parliamentary time allows” to give the Bank of England new powers and flexibility to manage the demise of a large insurer, mirroring the resolution regime for banks, which was established in 2009, according to FT.

Regulators have already introduced rules to deal with ailing banks after global financial crisis more than a decade ago left taxpayers picking up the bill.

But no such specifically tailored regime currently exists in Britain to deal with failures in the country’s insurance industry, which is the fourth largest in the world.

The UK is pressing ahead with plans to create a resolution regime to deal with the failure of big insurance companies, saying the “swift and decisive” action to rescue Silicon Valley Bank’s UK arm in underlined the importance of such arrangements.

The UK finance ministry said in a response to a public consultation on introducing a regime for insurers that the Bank of England’s ability to deal with Silicon Valley Bank’s UK subsidiary this year showed how specific resolution rules could enhance UK financial stability, according to Reuters.

The European Union is in the process of approving its own set of rules for handling insurance company failures.

In Britain, insurance company collapses currently come under modified UK company insolvency arrangements, which the finance ministry said may be less effective for an industry with 2.7 trillion pounds ($3.45 trillion) in assets.

Bank of England to gain powers to manage demise of UK large insurers

The introduction of an insurer resolution regime would also ensure the UK remains at the forefront of international standards. UK branches of foreign insurers, including those from Gibraltar, should also come under the new rules.

The ministry said it had considered whether the Lloyd’s of London insurance market should also come under the new regime but decided against it given the market already has to comply with winding up regulations specifically designed for it and there was a need to avoid duplication.

Under the rules for dealing with failed banks, they are required to issue a special form of debt that can be written down to replenish burnt out capital as part of a resolution process.

HSBC bought the UK arm of the failed technology-focused lender in March for a symbolic £1 after last-minute talks led by Rishi Sunak and the BoE. The central bank is reviewing its resolution regime for smaller banks after the collapse of the California-based Silicon Valley Bank.

The Treasury said the proposed insurance regime would seek to preserve continuity of insurance cover for policyholders, avoid the “significant value destruction” for the sector of an insolvency process, and support public confidence in insurers.

The Association of British Insurers welcomed how the government’s plans “focus on ensuring a level-playing field” for insurers.

The industry is still haunted by the failure of Equitable Life, which came close to collapse two decades ago, with policyholders losing billions of pounds and the government paying more than £1bn in compensation.

The ministry said it would not introduce a similar requirement for insurers.

Shareholders in a failing insurer would be the first to absorb losses, ahead of unsecured creditors, to fund the “bail in” of an insurer, helping to keep taxpayers off the hook.

Insurers deemed “systemically important” would be required to work with regulators on plans setting out what would happen in a collapse, the ministry said.

The timing of the new regime is unclear given that legislation is needed and Britain is likely to face national elections next year.

But both the EU regime and the UK plans include a “no creditor worse off” safeguard, meaning that no customer should be worse off than they would be if the insurer had become insolvent.

The UK plans also provide top-up payments for those customers who are protected by the Financial Services Compensation Scheme, which provides redress when insurers fail in certain circumstances.

The Treasury said that the public consultation, issued in January, had received “near unanimous support” from respondents that the resolution regime should align with international standards.


By Huw Jones, Ian Smith and Laura Noonan