The Financial Services Authority (FSA) is releasing some of the pressure on life companies which forces them to sell equities in order to stay within statutory rules governing solvency. The regulator has indicated it may be willing to grant a waiver in the rules on how solvency is calculated, albeit on an individual basis.
Insurers have been pressing the FSA for months to change counter-productive regulations. At the moment, life insurers must have 4% more liquidity than the amount they have guaranteed to pay out.
In a letter sent to the chief executives of UK life insurance companies, John Tiner, managing director of the FSA, said that as the current rules did not represent solvency in the traditional sense, they should be seen as more of a ‘trigger point’ for action. He indicated the FSA wanted to introduce a more ‘realistic’ approach, taking into account wider factors.
‘We plan to introduce this realistic approach from the start of 2004 and are considering allowing firms to disclose their financial position on a realistic basis in their 2003 year-end regulatory returns,’ he said.
In the meantime, any life insurance firms close to breaching the solvency rules could apply for a waiver, but Tiner added: ‘If the waiver was granted, there would be no undue risk to customers.’
The regulator’s actions have been welcomed by the Association of British Insurers (ABI) for introducing an element of flexibility while preserving strong regulation.
Mary Francis, director general of the ABI, said: ‘John Tiner’s letter recognises insurers have substantial reserves, over and above the funds they need to meet all liabilities to their policyholders. This should ensure insurers will not have to sell equities when that is not in the best long-term interests of their policyholders.’
The FSA pointed out few firms have indicated they are pressing against or have breached the limit.
Speaking at the annual conference of the Association of Investment Trust Companies, Tiner said: ‘Life insurance firms, like other financial firms, should hold capital sufficient to protect their customers, taking into account the risk profile of their assets, and the estimated levels of their liabilities and other financial uncertainties.
‘If they judge that holding a certain level of equities in their portfolios represents good value and is in the best interests of their policyholders, then provided they have enough capital to support such asset allocations, the regulations alone should not force them to sell with a falling market, potentially creating a downward spiral.’