Further relaxation of 'Resilience Test' for Life Insurance Companies

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

"We recognise that in current unusual market conditions further steps are necessary to avert the need for some insurance companies to sell equities for short-term technical reasons in a way which could be damaging to the interests of their policyholders. So we are doing two things.

First, a further temporary relaxation of the resilience test guidance so that life insurers no longer need to make an ongoing assumption of a 10% fall in equity markets. We would instead expect actuaries to apply their professional judgement in this area, which could well lead in some circumstances to a lower percentage figure being assumed.

Second, we will support appropriate applications from companies to anticipate a rule change due to take effect on 1 December which will have the effect of allowing companies a deeper, but still prudent, discount of their future liabilities.

The overall effect of this action is to underline the flexibility that insurance companies and their actuaries have to exercise their own judgement as to the most appropriate investment strategy to adopt for their own particular circumstances. But, of course, they are still required to take a prudent view of the assets they need in excess of their liabilities."

Notes for editors

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

2. The 'resilience test' offers guidance on the scenarios life insurance companies might use to test the ability of a fund to withstand major falls in asset prices such as equities and fixed-income securities.

3. On 11 September, the FSA announced a temporary relaxation of the element of the resilience test which assumed a 25% fall in equity markets combined with a 3% rise in interest rates.

4. 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.

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