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LONDON (Reuters) - Britain's banking and insurance regulator has warned motor and home insurers about the risks of drawing on the reserves they have built up against future claims to boost profits.
A climate of competitive pressure in the UK insurance market, alongside low returns from investing insurance premiums, has prompted some insurers to release reserves from previous years to help their annual performance, the Prudential Regulation Authority said in a letter to insurance chief executives dated Nov 13, a copy of which was seen by Reuters.
This leaves them at risk of having insufficient reserves if market conditions worsen.
"The PRA will question the robustness of the underwriting practices at firms that rely unduly on prior year reserve releases to support ongoing underwriting activity for any substantial period of time," Chris Moulder, director for general insurance, said in the letter.
The regulator said "firms should stand ready to demonstrate the robustness of their reserving governance frameworks" as part of "regular supervisory interactions".
British motor and home insurers include RSA (L:RSA), Admiral (L:ADML) and Direct Line (L:DLGD).
The letter comes a few weeks before insurers start preparing their full-year results.
As part of regulators' attempts to avert another global financial crisis, insurers are increasingly coming under scrutiny.
Bank of England Governor Mark Carney has said Britain will vet top insurance officials and actuaries, bringing the sector in line with banks, to make misconduct by individuals easier to punish.
(Reporting by Carolyn Cohn; Editing by Stephen Powell)