LONDON (Reuters) - Some British insurers have been too quick to tap reserves for propping up profits, the sector's top regulator said on Wednesday in its most direct warning yet.
David Rule, head of insurance supervision at the Bank of England's Prudential (LON:PRU) Regulation Authority, said despite falling premium rates, general insurer profits have for years been sustained by the absence of big payouts and releases of reserves.
Levels of reserve releases were now running at their highest level for thirty years, Rule said in his first speech in the job.
Insurers can tap reserves if these are "genuinely" redundant, meaning the likelihood of future claims has been reduced - but not as means of sustaining reported profits, Rule said.
PRA calculations show that the release of reserves assumes very low future claims "inflation".
"If the future trend is in fact in line with past inflation, booked reserves would need to be 25 percent higher than currently assumed," Rule told an industry conference in Dublin.
"Insurers... have critical questions to answer about the future direction of claims inflation."