FSA rules 'could force mutuals out of business'

Change in policy will hit mutual insurers' future plans

The Chief executive of one of Britain's leading mutual insurers has warned the sector may be forced out of business by strict new rules from the regulator. Chris Evans, the chief executive of MGM Advantage, said yesterday: "There has been a change in policy by the Financial Services Authority (FSA), a new interpretation of policy with regard to mutuals and the products they can offer. This will force many mutuals to either consider merging or closing to new business and going into run-off."

Mutual life insurers are owned by their "with-profits" policyholders. Yet their numbers have been in rapid decline because "with-profits" savings plans are seen as old-fashioned and have also been linked to scandals.

Many mutual insurers have been exploring alternative lines of business which might allow them to continue in business after their with-profits funds have closed.

But a letter from the FSA's head of retail, Jon Pain, said mutually owned with-profits insurers cannot now write any non-with-profits business unless they can prove "that the new non-profit business can be written on a basis which is unlikely to have a material adverse effect on the interests of its existing with-profits policyholders".

It is the interpretation of this rule that has caused a major problem in the industry because the FSA has told insurers they must transact only with nonprofits business while there are still with-profits policyholders around to benefit from it. That means they are faced with no other option but to wind themselves up when the with-profits business dries up.

The ruling comes at a time when there has been increased interest and support for mutually owned financial institutions because of a string of failings by listed financial companies.

Several politicians have openly spoken out in favour and have looked at ways to encourage the sector. Mr Evans said: "The problem with this ruling and consequences of it is that mutuals cannot use their with-profits fund to generate new business. The only way to grow is to generate with-profits members but with-profits is now unpopular for a number of reasons."

Mr Evans believes MGM could deal with the problem with a new type of flexible annuity, one that provides people an income when they retire and makes policyholders members of the society and able to benefit from the fund without many of the traditional features that made with-profits controversial.

He added: "We think this approach could work for the sector. The only way for the mutual to survive in business is to work out how to develop new products that comply with the FSA requirements."

There are just over 50 mutual insurers operating in Britain, including friendly societies, together with a similar number of building societies, which have faced pressure themselves as a result of low interest rates squeezing margins and a lack of wholesale funding.