The Financial Services Authority (FSA), the UK financial regulator, has announced new rules for life insurers, in the hope that they will boost confidence in the industry and prevent further crises like the near-collapse of Equitable Life.
Under so-called “realistic solvency reporting,” large life insurers will have to account explicitly for policyholder guarantees and the changing value of investments. The change will apply to insurers whose financial year ends on 31 December or later.
Spurred by funding scandals and a three-year slump in equity markets, the regulator has revamped solvency requirements, introducing more onerous, risk-based capital rules for the life and non-life sectors. The watchdog was criticised after the near failure of life assurer and pensions provider Equitable Life in 2000. Equitable made guarantees to with-profits policyholders it could not keep but reporting rules did not bring the problem to light in time to prevent customer losses of more than 1.5 billion pounds ($2.7 billion).
“For companies which write with-profits business … provisioning and capital requirements will now be more closely linked to the payments and bonuses that policyholders expect,” David Strachan, the FSA’s sector leader for insurance, said in a statement. With-profits funds aim to pay bonuses to policyholders by using some of the return in good years to keep up payments when markets fall. The funds were the bedrock of the UK life insurance industry, but the recent stock market slump forced insurers to slash bonuses, underming confidence in the products.
The FSA said it would not yet extend the requirement outside the with-profits business. There will be a stronger capital requirement for non-life insurers but companies will report it privately to the FSA and not publicly, the regulator said. The FSA will require life insurers to account for their with-profits business using the more demanding of two methods — either a modified version of the current standard or so-called realistic reporting.