FSA/PN/114/2001
11/09/2001

The FSA has written to all Appointed Actuaries of life insurance companies announcing a temporary amendment to the so-called 'resilience test', which tests the ability of a fund to withstand major falls in asset prices such as equities and fixed interest securities. The resilience tests applied by firms to their own particular circumstances may require them to make additional provisions or to consider adjusting their investment strategy.

William Hewitson, Head of the Actuary's Department at the FSA, said:

"The third element of the resilience test was designed primarily to strengthen balance sheets during periods of high inflation. It includes a test for a 25% fall in equity values, alongside a 3% rise in long term interest rates. In current conditions, we consider that this particular scenario is considerably less likely. We believe it would be inappropriate if consideration of such an unlikely scenario were to encourage insurers to switch out of equities into fixed interest securities at a level which could be to the longer-term detriment of policyholders. Consequently, we are removing this particular element from the resilience test.

We are satisfied that the amended resilience test provides for appropriate prudential measures against stock market volatility subject to the Appointed Actuary being satisfied that a prudent approach has been taken by the company.

The overall effect will be to ensure that insurance companies continue to manage their businesses on the basis of prudent assumptions, while at the same time averting the need for them to engage in unnecessary technical selling to their detriment and that of their policyholders. It remains for companies themselves to make their own decisions on the proportion of equities to hold in their portfolios, within this prudential framework.

The FSA will be consulting on more permanent changes to the resilience test regime next year."

Notes for editors

  1. The full text of the letter to the Appointed Actuary of life insurance companies is attached.

  2. 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; the protection of consumers; and fighting financial crime.

  3. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.

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