FSA issues new rules on capital reserves for insurers

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The Independent Online

The financial Services Authority yesterday threw out the book of rules governing life insurers in a move that should stop another market meltdown from forced equity selling happening again.

Life insurers were last year blamed for sending the FTSE into the doldrums, as they dumped stocks to keep themselves above their statutory solvency margins. The heavy selling activity served to drive down stock markets further.

The FSA yesterday proposed new rules to govern how much capital insurers need to keep in reserve to meet their liabilities. The changes will reduce the pressure on with-profits funds to sell equities when stock markets fall as they will take in to account the ability of insurers to cut their bonus payouts to policyholders.

Under the FSA's proposals, the level of reserves life insurers with with-profits funds must hold will depend on how much they smooth the payouts they give to policyholders. The more they shelter policyholders from poor investment returns, the more capital they will have to hold as a cushion. Insurers that keep payouts close to the value of their investments will have lower capital requirements.

Standard Life, for example, has in the past three years made heavy losses on its investments, but it has kept payout levels high. Norwich Union has also had a generous payout system, where policyholders were receiving 18 per cent more than the value of the assets backing their policy in the with-profits fund.

The FSA will also have powers to set higher capital requirements than the minimum levels on companies that carry higher risks.

"These proposed rules are a major step forward in the modernisation of insurance regulation. They will provide a more appropriate and sensitive calculation of regulatory capital requirements for life insurers," Clive Briault, a director at the FSA, said.

A number of insurers were given temporary waivers to the old solvency rules this year, but under the new proposals, these will no longer be needed. Complex accounting tricks, such as banking future profits on balance sheets today, will also be made redundant by the changes, as a companies' capital requirements will be judged on what their assets and liabilities are at the time.

The Association of British Insurers yesterday welcomed the move, saying insurers would now be in a position to manage their funds better.

"If there are volatile markets in the future, returns to customers will have to reflect this reality, but these proposed changes will mean that capital can be better used to sustain returns to shareholder and policyholder alike," Peter Vipond of the ABI yesterday said.

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