That’s Life

Falling equity values have set alarm bells ringing in the life insurance industry and the FSA recognises that concerns over solvency may prove self-fulfilling if insurers offload more stocks, driving prices down still further, in a bid to shore up their financial position. John Tiner, Managing Director, Consumer, Investment and Insurance Directorate, FSA, in a letter to CEOs of life companies at the end of January, noted that the Regulatory Minimum Margin (RMM) “does not represent ‘solvency’ in the traditional sense of the term”; he suggested that it might be better characterised as a “regulatory trigger point”. In response to these problems he said the regulator intended to introduce, from the beginning of 2004, an alternative “realistic” approach to solvency calculation. It will involve a clearly documented, robust determination of realistic liabilities – asset shares, smoothing costs, Guaranteed Annuity Rate (GAR) and other guarantee costs – plus a safety margin or capital buffer to reflect the potential impact of stress in key risk areas, for example, equity and property values, interest rates shocks and credit risk exposures in the asset portfolio. He also reminded firms that in the interim they may apply to the FSA for waivers or modification of RMM rules, when their realistic position would be central to the regulator’s decision. In a speech on 26 February, Mr Tiner went further, saying that the FSA will also look at the scope for earlier general adoption of the realistic approach that could see life insurers report their end-2003 position on both a realistic and statutory basis in the March 2004 public regulatory returns.