By Huw Jones
LONDON (Reuters) - Insurers may face a "huge hit" if they end up being wrongfooted by rule changes linked to climate change, the Bank of England (BoE) said on Tuesday.
Paul Fisher, deputy head of the BoE's Prudential Regulation Authority (PRA) that supervises banks and insurers, said insurers investing in fossil fuel assets could be left "stranded" by policy changes which limit their use.
"As the world increasingly limits carbon emissions and moves to alternative energy sources, investments in fossil fuels and related technologies ... may take a huge hit," Fisher told an Economist conference.
"There are already a few specific examples of this having happened," he said, without saying which cases he had in mind.
The PRA was "quite a long way" from considering extra capital charges on insurers to cover risks from fossil fuel investments, but wanted to put the issue on the industry's agenda.
He said he met with asset managers in Edinburgh on Monday and it was clear his concerns had yet to "permeate" the sector.
A chunk of fossil fuel reserves will have to stay in the ground otherwise the planet would be ruined, he said. People who have invested in these reserves had better think about their future value, Fisher added.
The BoE will deliver a report to the government later this year on the issue.
"We are seeking to understand how these changes may impact upon the PRA's objectives and how that could shape our role," Fisher said.
He also warned the industry that anyone wanting to move into a new business area will have to demonstrate they understand the risks, especially from cyber crime.
"Insurers will need to deal with the PRA in an open, co-operative and constructive manner, to allow us to understand whether the business model is sustainable and to identify key vulnerabilities," he said.
Fisher stressed the need for insurers to focus on "good governance", which may be challenging as the sector's speciality nature can make it difficult to recruit good senior people.
"To be clear, the Senior Insurance Managers Regime should not be operated in such a way so as to put good people off. The desired outcome is that of effective governance, not enforcement," he said.
The regime aims to make individuals at insurers directly accountable for their actions, making it easier for regulators to punish rule breaches.
(Editing by Tom Heneghan)