The new rules would also give the regulator more scope to set higher capital requirements than the minimum levels to reflect any additional risks in the business. In addition the new regime would require all life insurers to undertake their own self-assessments of how much capital they need to hold, including through undertaking stress and scenario tests. Similar rules have already been proposed for non-life insurers in CP190 published in July 2003.
Clive Briault, Director of the Prudential Standards Division at the FSA said, "These proposed rules are a major step forward in the modernisation of insurance regulation. They will provide a more appropriate and sensitive calculation of regulatory capital requirements for life insurers, especially those with large with-profits funds. They will link closely with the introduction of our new requirements for these funds to issue statements of how they will determine payments to their policyholders as well as reducing the pressure on with-profits funds to sell shares when the stock markets fall. The proposed rules are a refinement of an approach that was outlined in earlier consultation papers and the Tiner report, and which formed the basis of waivers from our current requirements that were granted to some life insurers earlier this year."
The proposed rules on the calculation of minimum regulatory capital would require life insurers with large with-profits funds to undertake two calculations to determine their minimum regulatory capital requirement- a modified version of the current calculation and a new, more realistic one which takes into account discretionary payments more explicitly. Life insurers would then have to hold enough capital to cover whichever calculation gave the higher result. Under the proposals companies would publish both the statutory and realistic figures once a year. They would also submit a further update on their realistic figures to the FSA every 6 months.
The new rules on capital propose that all life insurance firms would in future be given individually tailored guidance on how much capital they should hold, similar to the system already in place for banks in the UK. This individual capital guidance would be set with reference to the specific business and control risks incurred by each life insurer. The onus would be on life insurers to make their own assessment of their capital requirements and then discuss it with the FSA. Following these discussions the FSA would then be able to vary each insurer's regulatory capital requirement.
The timetable for implementing the proposals envisages that the new way of calculating capital requirements would come into force during the second half of 2004. The consultation period for CP195 is until 30 November 2003.
Background
- The new rules on calculating capital requirements would be compulsory for all life insurers with aggregate with-profits liabilities of £500 million or more. These firms represent 95% of the with-profits life insurance liabilities.
- Capital requirements calculated on a regulatory basis would include guaranteed benefits. Capital requirements calculated on a realistic basis would include all payments to policyholders, whether they are guaranteed or discretionary. As the realistic calculation of capital requirements has no in-built margins for adverse experience, insurers would have to have an additional amount of capital to act as a buffer. The FSA is commissioning actuarial work to calibrate the size of this buffer.
- Proposals for the calculation of capital requirements also include changes to some of the methods and assumptions underlying the calculations - eg the assumption that all policy holders will take up a guaranteed annuity option. The waivers granted to some companies earlier in the year anticipated some of these changes.
- All with-profits insurers will continue to have to meet the EU minimum requirements. These are broadly that with-profits insurers have to have at least 4% of assets over and above their liabilities to meet the guaranteed payments to policyholders.
- In July 2003 the FSA published its proposals for an enhanced capital regime for non-life insurers. This can be accessed at www.fsa.gov.uk/pubs/cp/cp190. Previous consultations on the new financial rules for insurance companies can be found at www.fsa.gov.uk/pubs/cp/cp143, www.fsa.gov.uk/pubs/cp/cp136, www.fsa.gov.uk/pubs/policy/ps136 and www.fsa.gov.uk/pubs/cp/cp97.
- Some syndicates at Lloyds of London also underwrite life insurance, although this only accounts for a small proportion of the overall life market. The FSA will be developing rules for Lloyds that are consistent with the ones proposed in this paper but take into account the unique features of Lloyds.
- The FSA set out its plans for reforming the regulation of insurance in its paper entitled The future regulation of insurance - a progress report in October 2002, also known as the Tiner report.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
