Insurers' solvency 'at risk from longer life expectancy'

Britain's insurance companies could run out of money in the years to come, from having to pay out retirement incomes to people with ever increasing life spans, the Financial Services Authority warned yesterday.

Publishing its most wide-ranging report to date on the impact of Britain's ageing society, the City watchdog also warned insurers not to try to escape from the crunch on their finances by introducing small-print clauses that cap the total a company will pay out to an annuitant.

Carol Sergeant, the head of the FSA's consumer divisions, said: "The consequences of an ageing population have not yet been fully appreciated. It will not be enough for the industry simply to offer the products of 30 years ago."

The regulator will monitor carefully how companies are coping with the upward trend in life expectancy, looking at changes they make to their financial reserves compared to their projections of annuity payouts. The FSA's paper, Financing the future: mind the savings gap! warns: "If the pricing of annuities is wrong, this might not be known for decades as it will take time for mortality experience and investment returns to play out."

Annuities will have to be repriced, making them more expensive, due to figures showing average life expectancy for women is likely to increase from 49 in 1901 to 84 by 2011. For men it will have increased from 45 to 80 in the same period.

The FSA's warning comes after a period of difficulty for Britain's insurers, which have suffered from the two-year decline in the stock market and incidents such as the 11 September terrorist attacks.

The regulator is monitoring insurers very closely, and has asked some to report on the state of their finances on a quarterly basis.

The FSA welcomed insurers designing new types of retirement products to cope with changing lifestyles and demographics. But it highlighted pitfalls that could occur in marketing literature of new and more complex products, such as customers not understanding that they have not bought themselves a retirement income for life.

An FSA spokeswoman said: "If companies bury things in the small print and think they can get away with it, they cannot because they have to be clear and fair to consumers."

The insurance industry defended its record of pricing annuities carefully. John Lawson, the senior technical manager of Standard Life, said: "Our annuities are keenly priced but I am confident that we are not going to make a loss on the business we are writing now. Life companies monitor mortality rates all the time and we are not pricing our business on out-of-date rates."

The second prong of the FSA's report was on the problem of why consumers who are both near to retirement and just starting their careers do not save enough for retirement. The body is pushing for insurers to make saving more attractive by recommending the annuity market is made more flexible.

It is also promoting a Government scheme that will see everyone with a private pension receive an annual statement of what their final pension is likely to be.