The Financial Services Authority (FSA) has hit back at criticisms of its new solvency regime, saying that no one could argue with making insurance companies reserve for what they have promised customers.
Speaking at a conference in London yesterday, David Strachan, the head of insurance regulation at the FSA, said the regulator was only casting light on what insurance companies have so far kept "out of sight, out of mind, and ultimately off the balance sheet". He said although the regime had been "uncomfortable to say the least" for some, it was "right that firms hold enough capital to back their promises".
Mr Strachan said: "Those not acquainted with the world of insurance would be astounded to hear that, under the existing regime, firms are not required to back all of their promises with hard financial resources. Even for contractual options, firms' approaches are not as robust as might be expected. The reform has revealed all sorts of things that firms either overlooked or had preferred to keep out of sight. It is no more complex than to ensure that firms have enough capital to honour the promises they make."
The new regime has led Standard Life, previously a staunch defender of its mutuality, to dump £7.5bn of equities, hike charges and cut bonuses to customers, as well as consider a stock market flotation. Such extreme action has raised concerns from MPs that mutuals will be forced out of business by the new rules. Some fear they are a knee-jerk reaction to the demise of Equitable Life, which came close to collapse after failing to reserve for its guarantees.
But Mr Strachan said the FSA had no axe to grind with the mutuals, nor was it trying to "strong-arm" companies into selling shares regardless of the market price. He said the new regime should not herald the death of the with-profits savings industry.
His comments came as Equitable Life policyholders called for the report published last summer from the Parliamentary Ombudsman, which cleared regulators of failure, to be overturned. They say the findings of the recent Penrose report cast grave doubts over the Ombudsman?s original report. MPs will debate the Penrose report today in Parliament.Reuse content