The Bank of England warned that life insurers are taking an “optimistic” view of how easily they could ditch sub-investment-grade assets in tough times.
(Bloomberg) — The Bank of England warned that life insurers are taking an “optimistic” view of how easily they could ditch sub-investment-grade assets in tough times.
The Prudential Regulation Authority, part of the BOE, made the comments as it issued the results of its 2022 stress test for the industry. Most firms assumed they could sell such assets within six to 12 months but “this could be optimistic, especially as other investors would also be taking similar actions,” Charlotte Gerken, executive director of insurance supervision at the PRA, said in a letter to insurance bosses.
The stress test scenario assumed that life insurers would sell between £8 billion and £9 billion ($9.9 billion to $11.1 billion) of liquid sub-investment grade assets. The test was set before last year’s pension selloff, in a set of circumstances the BOE said “illustrate the importance of firms developing and adapting their own scenario analyses.”
Pension funds with leverage-driven investment strategies were caught on the hop after the UK’s government’s mini-budget caused falling gilt prices, forcing funds into a wave of asset sales. The dramatic price drop could have damaged the whole economy, Sarah Breeden, executive director for financial stability strategy and risk, said in November.
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