FSA launches radical new approach to insurance regulation
01/10/2002
In a major report, published today, the Financial Services Authority sets out how the regulatory framework it inherited for the insurance industry is being completely overhauled. Over the past twelve months, the FSA has re-organised its insurance regulatory activities, strengthened its team of supervisors with specialists recruited from the market and elsewhere within the FSA, and started implementing a new pro-active and challenging relationship with firms.
In doing this, the FSA has laid down the platform to execute effectively the policy reforms described in the report, and its "risk based" approach to supervision.
John Tiner, the FSAs Managing Director, Consumer, Investment and Insurance, has led the review, which lays out what the FSA expects from insurance firms:
More openness with regulators and consumers
Increased responsibility and accountability for senior management, and
Greater awareness of the impact of their actions on consumers.
John Tiner says:
"This is clearly a challenging time for the insurance industry worldwide. We are ensuring that the UKs regulatory regime is sufficiently robust and flexible to cope with changes. The industry needs to respond not only to market pressures, but also the changing regulatory environment.
"The effective implementation of the new insurance regime is an immediate priority for the FSA, and consistent with this, we are in the process of carrying out "risk assessments" on the largest 200 insurance firms. We are also continuing our work to improve the framework that sets capital requirements for insurance firms."
The FSA report coincides with sharp falls in the UK equity market. The sharp falls in the equities markets have impacted on all investors, and with profits policyholders are not immune. Insurers have responded by cutting bonuses, increasing exit penalties or withdrawing from some or all parts of the market.
John Tiner says:
"Its the responsibility of insurance firms to monitor their own capital to ensure they satisfy regulatory requirements, so they can meet policyholder liabilities in the short and long-term. "As the report states, it is our intention to reform the calculation and reporting of solvency margin requirements including making the prudential margins more transparent.
"In anticipation of this and for prudential monitoring purposes, we have asked the largest life insurance firms to prepare an assessment of their liabilities on what actuaries term a "realistic basis". This realistic assessment includes both guaranteed and future discretionary benefits and takes account of future investment performance.
"On the basis of our work so far, its fair to say that the survey revealed that, on a realistic basis, life offices have significant ability to withstand further large falls in equity values from the level at which the exercise was commissioned (FTSE 100 at around 4000).
"In practice, firms need to hold assets well in excess of these best estimate liabilities in order both to absorb unexpected losses and liabilities and to support future new business. The survey confirms that the insurance industry does indeed hold such excess assets."
Notes for editors
The FSA report is called "The future regulation of Insurance: A progress report" and is available on the FSA website at http://www.fsa.gov.uk/pubs/policy/.
The risk assessments that the FSA is conducting on 200 insurance companies are designed to enable the FSA to identify and take mitigating action in respect of, significant risks to its statutory objectives.
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.