UK General insurers might have to boost the amount of capital they hold to cushion themselves against going bankrupt, under far-reaching new guidelines for the sector set out by the Financial Services Authority yesterday.
John Tiner, the FSA's managing director in charge of insurance, said the number of general insurers which have collapsed in the past 20 years had been "too high".
Mr Tiner, who is being promoted to the new role of chief executive of the FSA in September, said that "weak capital requirements and management practices" were major reasons for the failures, which included in 2001 the implosion of Independent Insurance. The new regime, which the FSA is phasing in from next year, will scrap the current system under which companies have to hold an amount of capital calculated according to a fixed formula to satisfy solvency requirements.
Mr Tiner's regime will be similar to the Basle regulations which are being phased in for banks, and will require companies to carry out a more sophisticated assessment of their own liabilities. The onus will be on the insurers to inform the FSA of their risk profile and the amount of capital they believe they should hold.
The regulator will then analyse companies' findings before ruling on whether it is happy with the decision. The new system will mean some insurers will be able to reduce their capital reserves because several currently hold more than they need to, the FSA said.
However, the FSA warned, others will have to increase reserves. Some might have to raise capital in the market in order to do this. If companies are not able to boost their reserves, the regulator will be able to order insurers to reduce the amount of business they are writing. The new system is aimed primarily at insurers that write complex lines of business, such as employers' liability and contractual risk.
The risk to the insurer from these types of cover is very difficult to assess because payouts can arise many years after the policy has been written and the sum involved in a single case can be huge. Peter Vipond, head of financial regulation at the Association of British Insurers, welcomed a more "risk-based" approach to insurance regulation.
The FSA said insurers would only have to show how the new regulations might theoretically affect their balance sheet next year. But it is expected in 2005 or 2006 to make the new capital requirements compulsory.Reuse content