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New rules on capital for life insurers

Date: Fri, 29 Aug 03 Analysis

The Financial Services Authority (FSA) has announced plans to shake up the rules governing the amount of capital that life insurance firms must hold.

The new plans are designed to reduce the business risks of companies selling life insurance products, and particularly the pressure to sell shares when the stock markets fall.

Under the new system, life insurers would be required to carry out a self-assessment to determine the minimum amount of capital they need, which would be linked more directly to the way in which they 'smooth' payments to policy-holders depending on the investment climate.

The recent financial downturn highlighted the inadequacy of the system, with many companies running with-profits funds forced to sell equity to meet solvency requirements.

'These proposed rules are a major step forward in the modernisation of insurance regulation,' Clive Briault, FSA director of prudential standards, commented.

'They will provide a more appropriate and sensitive calculation of regulatory capital requirements for life insurers, especially those with large with-profits funds.'

The changes will also bring life insurers in line with other sectors of the industry, for which the FSA put forward new capital regulations in July.

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