Life offices urged to disclose impact of interest rate falls

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THE GOVERNMENT is writing to life insurers to assess the impact of an unprecedented plunge in long-term interest rates which is likely to force the industry to set aside billions of pounds in extra reserves.

Amid fears that the financial strength of life offices has been weakened by the global financial crisis, the Government Actuary is asking life offices to disclose how far the plunge in long-term interest rates has damaged their balance sheets.

In the first official estimate, the Government Actuary's department forecasts that life offices will have to set aside between pounds 6bn and pounds 7bn to cover liabilities in one field of business alone - guaranteed annuities.

Life offices in the 1970s and 1980s guaranteed pension customers a minimum rate of income when they eventually bought an annuity. But the unexpected fall in long-term interest rates has made these much more expensive to finance. Sun Life of Canada alone has set aside pounds 114m to make sure it can pay annuity guarantees.

William Hewitson, a senior official at the Government Actuary's Department, said: "We are writing to all the different life offices asking for more details of exposure to guaranteed annuities in the past. With the current [market conditions] we would estimate that companies would be setting aside something of the order of six or seven billion pounds."

He added that some companies may find they are financially weakened by the problem, leaving them with fewer free assets than before. Free assets are a crucial determinant of the level of annual bonus paid to holders of endowments, life insurance and pensions.

"It must lead to some reduction in the free asset ratios for a number of companies. We are currently looking at who might be affected. In any case where companies might have a problem, we will be talking to them."

Fears are mounting that the fall-out of the financial crisis will not be confined to annuity guarantees. Experts are increasingly worried it may impair the ability of life insurers to finance new business, and that it could also affect their solvency.