Bank of England Monetary Policy Report News Conference, in London
The logo of Bank of England is pictured during the Monetary Policy Report News Conference at The Bank of England, in London, Britain November 3, 2022. Reuters

Britain's proposals to loosen capital rules for insurers will increase the chances of an insurance company failing by 20% in a given year, the Bank of England has told lawmakers, reiterating its caution over the government's plan.

Following Britain's departure from the European Union, its finance ministry has proposed easing capital requirements for insurers to unlock billions of pounds for investing in infrastructure to boost the economy.

Easing the so-called Solvency II rules inherited from the EU is seen as a key "Brexit dividend" for the financial sector, and the ministry overrode warnings from the Bank of England, saying policyholders would still be protected.

The BoE looked at the impact of the government's plan to ease the risk margin, a capital buffer life insurers must hold to move policies to another insurer in the event of a collapse.

BoE Governor Andrew Bailey said in a letter dated Feb. 22 to parliament's Treasury Select Committee, published on Monday, that "in the round" over a one-year period, the estimated capital release of 14 billion pounds ($16.80 billion) could lead to an increase in the annual probability of failure of approximately 0.1 percentage points.

"This means that over a one-year period... the probability that a life insurance firm would hold sufficient capital to withstand the solvency standard stress level will be 99.4% when compared to the current level - a relative increase in the probability of failure of around 20%," Bailey said.

If the BoE's proposed reform had gone ahead, which advocated easing the risk margin by less than the government proposes, then "less than half of this increase would have occurred", Bailey said.

"If a future failure occurs, it would be difficult to predict the quantum of losses, nor is it certain that it would be limited to a single firm," Bailey said.

The BoE will implement the ministry's proposed reforms of Solvency II if approved by parliament, Bailey said.

($1 = 0.8335 pounds)