The Bank of England (BoE) has put out a letter urging the UK insurance sector to ensure their reserves are sufficient as claims inflation continues to threaten the market.

In a statement addressed to chief actuaries of general insurers and managing agents under Lloyd’s, the BoE said that claims inflation due to factors such as rising wage, medical, and raw material costs is expected to affect all general insurers.

“As we have communicated previously, we expect claims inflation to affect all general insurance firms, although the nature of the impact will vary depending on the firm’s business model and risk profile. There is a risk that persistently elevated claims inflation might result in a material deterioration of solvency coverage for some firms unless they take appropriate mitigating actions,” the BoE said in its letter.

The BoE also stressed that technical provisions must be calculated based on up-to-date, credible information, and realistic assumptions.

“Firms also need to ensure the risk of further claims inflation is appropriately allowed for in internal model (IM) solvency capital requirement (SCR) calculations and where the standard formula (SF) is used to calculate the firm’s SCR, that it remains appropriate,” the BoE said.

The bank also highlighted its assessments come 2024, saying that it will continue to be in line with the Prudential Regulation Authority’s approach to insurance supervision and will consider the external environment in which these insurers operate. This includes reviewing potential system-wide risks, one of which is threats of insolvency resulting from low reserves.

“We trust this letter will be useful as your firm prepares for its mid-year reserving exercise, along with capital and business planning for 2024 later in the year,” the BoE said.

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