On Wednesday, Britain announced that it would start developing new regulations aimed at preventing the financial system from being destroyed by the failure of a significant insurance business.
After the taxpayers bore the cost of the global financial crisis more than ten years ago, regulators have already put in place rules to cope with failing banks. However, there is currently no equivalent precisely customized approach in place in Britain to address problems in the country’s insurance sector which is the fourth-largest in the world.
In response to a public consultation on establishing a framework for insurers, the UK finance ministry claimed that the Bank of England’s handling of Silicon Valley Bank’s UK unit this year was an example of how specialized resolution regulations may improve UK financial stability.
The approval of the European Union’s own set of guidelines for handling the failure of insurance companies is now underway.
The existing modified UK firm insolvency procedures in place in Britain for insurance company failures, according to the finance ministry, may be less efficient for an industry with $3.45 trillion worth of assets.
The government added that UK branches of foreign insurers, including those from Gibraltar, should also be subject to the new regulations, saying that “the introduction of an insurer resolution regime would also ensure the UK remains at the forefront of international standards.”
The Lloyd’s of London insurance market already needs to abide by winding up procedures specifically created for it, so the ministry claimed it had thought about including it in the new regime but decided against it since there was a need to prevent duplication.
Failed banks are required to issue a unique type of debt that can be written down to refill depleted capital as part of a resolution process, per the regulations for handling them.
The ministry declared that it will not impose a comparable demand on insurers.
In order to “bail-in” an insurer and keep taxpayers off the hook, shareholders of a failing insurer would take on losses before unsecured creditors.
According to the government, insurers deemed “systemically important” would be compelled to collaborate with authorities on plans outlining what would happen in a collapse.
Given the necessity for legislation and the likelihood of national elections in Britain next year, the date of the new regime is uncertain.
In order to promote economic investment, Britain is also drafting separate regulations that will reduce the capital requirements for insurers.
