FSA imposes tougher rules on insurers

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The Independent Online

The UK insurance sector was dealt a double blow by the Financial Services Authority yesterday, as it criticised the industry for its poor risk management controls and annou-nced plans for stricter capital adequacy rules by the end of next year.

The UK insurance sector was dealt a double blow by the Financial Services Authority yesterday, as it criticised the industry for its poor risk management controls and annou-nced plans for stricter capital adequacy rules by the end of next year.

In a Stock Exchange annou-ncement, the regulator said it would push ahead with plans to extend its new capital adequacy regime to insurance holding groups, as well as the individual subsidiaries which are already directly regulated by the FSA. This would prevent the larger insurers from letting standards slip within operations which are outside the FSA's remit, and which could threaten the group's overall solvency position.

Strictly speaking, insurers will not have to come in line with the new rules until the end of 2006. However, their group capital position will have to be declared publicly by the end of next year.

John Headley, a partner at Ernst & Young, said the new rules may force some firms to raise additional capital over the coming year, to come in line with the group capital requirements.

Aviva, the UK's largest insurance group, said that unlike its competitors, it has been complying with the FSA's rules for the past two years, and hence would not be affected by the changes.

While the regulator had not planned to make an announcement on its decision until next month, its hand was forced by Royal & SunAlliance, which issued its results on Thursday, hinting the FSA was minded to push ahead with its proposals. The regulator decided to issue an announcement to clarify the situation yesterday morning.

Hours later, it published its latest letter to the chief executives of Britain's life insurers, rapping them on the knuckles for having insufficient risk management controls in place. The letter, from the FSA's insurance sector leader, David Strachan, followed the completion of a review into how life insurers manage credit risk, considering specifically what contingencies were in place if money owed to the companies was not paid.

Mr Strachan said there were "pockets of weakness" such as failure to carry out independent reviews of their own credit analysis, and a failure to understand how easily assets could be liquidated if necessary.

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