Reinstatement of part of the 'Resilience Test' Guidance for life insurance companies
05/12/2001
The FSA has written to the chief executives and Appointed Actuaries of all life insurance companies and friendly societies to update them on how the FSA suggests they test the ability of their investment portfolios to cope with possible adverse market movements. In light of extreme equity market volatility, from 24 September the FSA suspended some specific tests for firms in assessing what sort of adverse market movements their investment portfolios could withstand. Instead, firms and actuaries were allowed to apply their own prudent assessment of these unusual conditions. This was done in order to avoid unnecessary technical selling of equities that could be to the detriment of policyholders and the market as a whole.
The FSA has decided that as equity markets are now somewhat more settled and the associated pressure for technical selling has abated, the 24 September guidance is withdrawn and the industry should revert to the guidance set out in the letter of 10 September.
The details of the resilience test guidance are set out in the attached letter that was sent to the industry yesterday. The letter explains that, in the longer term, the FSA proposes to introduce new and more dynamic methods of stress testing, and will be consulting on this issue during 2002.
Notes for editors
- The full text of yesterdays letter to the chief executives and Appointed Actuaries of life insurance companies and friendly societies is attached.
- The 'resilience test' offers guidance on the scenarios that life insurers might use to test the ability of a fund to withstand major falls in asset prices such as equities and fixed-income securities.
- On 10 September, the FSA announced a temporary replacement of the resilience test guidance last updated in May 2000 (by the Government Actuary) to reflect a lower inflation environment. (This removed the element of the resilience test that assumed a 25% fall in equity markets combined with a 3 % rise in interest rates.) On 24 September this was further relaxed.
- 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 appropriate 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.