Impact of the new regulatory regime
Since 2001, we have carried out a wide-ranging review of the way in which insurance firms are regulated. The overarching objective of the new regime is that insurance firms are soundly managed, adequately capitalised and treat their customers fairly.
The resulting reforms were developed and have now been implemented with the involvement and broad support of the insurance industry. Against this background, it is only right that we consider the impact that these changes are having on both the market and consumers.
Much of the day-to-day work carried out by our supervisors and the responses of the senior management of insurance firms goes unnoticed. In a proportionate regulatory regime that is the correct approach. It respects the relationship between us and the firms that we regulate, which in the main is rightly confidential.
Our supervisory activity covers a wide range of functions. Much practice we see is good and the vast majority clearly compliant. In some cases, there is discussion about the steps companies are taking to ensure compliance which leads to agreed action. Formal enforcement action is appropriate in only a small minority of cases.
This does mean though that consumers and other external stakeholders (including other firms) only see or hear about a small fraction of our work with firms to secure a fair outcome for consumers. It is for this reason that we are publishing these examples to illustrate the types of actions that our supervisors take under the new regime and how this is making a real difference to millions of policyholders. As well as helping our external stakeholders understand our day-to-day work with insurance companies, in putting this material into the public domain, we also intend to illustrate the industry's willingness to respond to concerns and to take corrective action where this is needed.
The examples included below illustrate a selection of the activity undertaken under the new regime, affecting large numbers of policyholders. We will add to these to include further examples of good and less good practice as they emerge.
Soundly managed…
Change of control – closed fund
Closed with-profits funds now account for £85 bn out of a total of £385 bn of assets invested in such funds. The size of this sector means that how life insurers run their closed with-profits funds is a continuing focus for us. In addition to monitoring and scrutinising how life offices manage these closed books of business, our remit encompasses the arrival of new third-party consolidators in this segment of the market. Here, our primary interest revolves around the transfer of ownership of the firm. When the ownership of a regulated business changes hands, the acquirer must get our approval through our 'change of control process'.
For us to approve a change of control application, a firm must pass two statutory tests:
- the acquirer must be a fit and proper person to have control; and
- the interests of consumers must not be threatened by the acquirer's control (as part of this, the regulated firm must continue to be able to meet the threshold conditions, the minimum conditions for authorisation).
In addition to these tests, we are able to attach specific conditions to our approval of the change of control, providing an additional protective layer around policyholders' interests.
We have used these safeguards to require firms to take certain actions, for example, for new controllers to maintain a margin of capital above the base regulatory requirements, agreeing a schedule for any capital release, or putting in place restrictions to determine when dividends could be paid to shareholders.
Corporate Governance
Corporate governance is a key area of regulatory scrutiny. One particular concern that can arise in the corporate governance context is the overall balance of the Board. Such concerns may include one individual carrying too much influence with insufficient challenge by the firm's Board. For one insurance firm where we had concerns over this risk, as well as having detailed discussions with the individual in question, we met with the firm's non-executive directors to emphasise the importance of their role and to secure their agreement to help monitor the situation and identify any emerging risks.
…well capitalised firms
Shareholder support to a with-profits fund
Ensuring that life insurers have sufficient capital to support their business – particularly so that they can honour policyholder commitments as they fall due - was one of the key drivers behind our decision to introduce our new "realistic reporting" requirements. A life insurer writing with-profits business discovered that it had undervalued the true cost of the guarantees made to its policyholders. The senior management of the firm brought this matter to our attention promptly.
Working with the company to help stabilise the business, our supervisory team agreed with the management a range of actions, including a one-off capital injection of around £500m from shareholder funds to support the with-profits funds.
Capital support from overseas parent
A general insurer was making substantial losses. To avoid the firm closing and going into run-off, a significant capital injection from an overseas parent to protect policyholders was secured. The closure of the firm would have resulted in the wholesale re-broking of risks (affecting hundreds of thousands of policyholders). Such a high profile closure would also have had a serious impact on confidence in the UK insurance market.
Prevented from writing new business
Following concerns about the level of capital and quality of controls in a general insurance company, we restricted the level of premiums the company could write until it had secured additional capital. When it became clear that none was forthcoming, we took action to prevent the firm from writing any further business. The firm chose to go into run-off.
This prevented the firm becoming insolvent at the time, and had a positive impact on market confidence and consumer protection.
…that treat their customers fairly
Review of sales
We visited a life insurer to assess its systems for monitoring its selling practices. The objective was to ascertain whether the firm had effective controls in place to prevent customers being sold unsuitable products. The firm volunteered to review its procedures to address the problems we identified and consider whether a wider review of historic sales was needed.
As a result, the firm made substantial changes to its procedures and decided to review around 15,000 sales to assess whether – and how much - compensation it should pay to affected customers. The process to review sales is now under way, and we expect that compensation paid will be significant.
Insufficient disclosure of risks to policyholders
We had concerns that the risks associated with a life insurer's with-profits policies were not adequately disclosed to policyholders. We also felt that the firm had not been sufficiently proactive in seeking to remedy losses incurred by customers who had policies in the fund.
The firm agreed that corrective action was needed, including offering all policyholders entering the fund after a certain date to go into a different fund with the same firm. The agreed sum of compensation benefited thousands of policyholders.
Ring-fenced assets
When the parent of a general insurer was taken over, the transaction involved a significant loan secured on the group's assets. The existence of the loan was not disclosed to the FSA until after we had approved the change of control. Subsequently, the supervisory team put great effort into ensuring that the assets of the insurance company within the group were ring-fenced. And, to protect policyholders, we made sure the insurer was outside the boundary of security for the loan.
Option to policyholders to switch funds
A with-profits company had been gradually reducing its exposure to equities to de-risk the fund in the light of significant guarantees given to policyholders. Following close monitoring by our supervisory team, the company proposed offering policyholders the option to switch their investments to a different fund in the same group. This would help give policyholders better future returns on their investment.
The firm is now moving ahead with the proposal.
