Thursday, 26 May 2016

Governor warns against chasing riskier assets

Governor warns against chasing riskier assets

Central Bank governor Philip Lane said Europe needs more co-ordination on protection schemes for insurance customers in the event of a firm failing.

His comments come as Irish insurers face the cost of the collapse of Malta-regulated Setanta Insurance.

Addressing Insurance Europe’s annual international conference in Dublin yesterday, Philip said much work still needs to be done to bring about consistent insurance supervisory standards across Europe.

‘The coordination of national protection schemes for policyholders remains unsatisfactory,’ he said. ‘Should an insurance firm fail, citizens are covered in full, in part or not at all, depending on where they are and where their insurers are regulated.’

While Philip did not name Setanta, the High Court last year ordered the Motor Insurance Bureau of Ireland to cover €90m of claims against the insurer, which sold policies exclusively in Ireland before it collapsed in 2014.

The High Court order is currently under appeal with the Supreme Court.

Philip said the main European supervisory body, the European Insurance and Occupational Pensions Authority (Eiopa), should look into authorisation processes and standards for insurers internationally.

‘I can only encourage Eiopa to press on this issue and ensure that firms that would not be authorised in one country do not find a home in another,’ he said.

The Central Bank governor also warned that life and general insurers should not seek to compensate for current low returns in their main business by investing in riskier assets.

‘Excessive risk-taking by insurance firms can be a source of financial instability, both directly and indirectly through the interconnections between the insurance sector, other financial intermediaries and financial markets,’ he said.

Philip said there is ‘clearly a challenge’ for life insurers, such as those who have traditionally included guaranteed returns to policy holders, amid a protracted low interest rate environment.

‘It may be tempting to seek returns from non-traditional and non-insurance activities,’ he said. ‘However, this strategy has clearly been a source of fragility for firms in the past.’

General insurers, who have largely been loss-making in recent years in Ireland amid soaring claims costs, should also avoid getting into riskier assets and instead focus on an ‘appropriate return from core underwriting activity’, he said.