LONDON, Aug 2 (Reuters) – Britain said on Wednesday it would start work on setting up new rules specially designed to prevent a big insurance company collapse from crashing the financial system.

Regulators have already introduced rules to deal with ailing banks after global financial crisis more than a decade ago left taxpayers picking up the bill. But no such specifically tailored regime currently exists in Britain to deal with failures in the country’s insurance industry, which is the fourth largest in the world.

The UK finance ministry said in a response to a public consultation on introducing a regime for insurers that the Bank of England’s ability to deal with Silicon Valley Bank’s UK subsidiary this year showed how specific resolution rules could enhance UK financial stability.

The European Union is in the process of approving its own set of rules for handling insurance company failures.

In Britain, insurance company collapses currently come under modified UK company insolvency arrangements, which the finance ministry said may be less effective for an industry with 2.7 trillion pounds ($3.45 trillion) in assets.

“The introduction of an insurer resolution regime would also ensure the UK remains at the forefront of international standards,” the government said, adding that UK branches of foreign insurers, including those from Gibraltar, should also come under the new rules.

The ministry said it had considered whether the Lloyd’s of London insurance market should also come under the new regime but decided against it given the market already has to comply with winding up regulations specifically designed for it and there was a need to avoid duplication.

Under the rules for dealing with failed banks, they are required to issue a special form of debt that can be written down to replenish burnt out capital as part of a resolution process.

The ministry said it would not introduce a similar requirement for insurers.

Shareholders in a failing insurer would be the first to absorb losses, ahead of unsecured creditors, to fund the “bail in” of an insurer, helping to keep taxpayers off the hook.

Insurers deemed “systemically important” would be required to work with regulators on plans setting out what would happen in a collapse, the ministry said.

The timing of the new regime is unclear given that legislation is needed and Britain is likely to face national elections next year.

Britain is also finalising separate rules to ease capital requirements for insurers to encourage investment in the economy.

($1 = 0.7833 pounds)

Reporting by Huw Jones. Editing by Jane Merriman

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