Tighter capital rules to head off non-life insurance failures

FSA Managing Director John Tiner said:

"While there have been very few failures amongst UK general insurers in the retail market, the failure rate amongst London market insurers over the last 20 years has been too high. Weak capital requirements and management practices played a major part in this. Capital is a major mitigator to the risk of insolvency and we believe that our proposals for better calibrated and more risk-sensitive capital requirements will lead to a better regime for non-life insurers aligned more closely to the risks underwritten and allowing for earlier regulatory intervention when financial problems develop.

"Furthermore, consumer protection lies at the heart of our regulatory approach and in line with this, it is important that the amount of capital a non-life insurer holds is sufficient to protect it from insolvency."

The new regime for non-life insurers will have two key features:

• A new risk-based enhanced capital requirement (ECR). This will be based on a capital charges to be applied to asset and insurance risks; and

• Individual capital guidance (ICG) to firms based on the FSA's own view of how much capital would be adequate for individual firms to hold taking into account firms assessments of their own capital needs.

John Tiner said:

"We plan to introduce the ECR in a phased way so that initially it will be a reporting requirement and only become a prudential requirement later. This is so that we can consult carefully on how the ECR is calibrated, assess its effect on individual firms, and allow time for the market to absorb the changes without stress.

For some non-life insurers the new requirements will have only a modest effect because they hold capital well in excess of the proposed requirements either for strategic reasons, risk sensitivity, to fund expected growth or for credit rating purposes. However for other non-life firms it could require them to respond by either raising new capital or by reducing the risks they face or underwrite."

Notes for editors

1. Consultation Paper 190 Enhanced capital requirements and individual capital assessments for non-life insurers is available on the FSA website at www.fsa.gov.uk.

2. The proposals set out today are part of the broader FSA approach to setting individual capital adequacy standards (ICAS) for regulated firms which was described in Consultation Paper 136 published in May 2002. A Consultation Paper on the planned new capital regime for life insurers will be published in the summer and we will consult during 2004 on the regimes for other sectors including deposit takers and investment firms who take principal positions. The ICAS framework will be introduced as part of the FSA's Integrated Prudential Sourcebook. For insurers (non-life and life) this will be in 2004 and for banks and relevant investment firms at the end of 2006.

3. Also published today is a Policy Statement Individual Capital adequacy Standards: Feedback on CP136 which sets out the FSA's thinking on how the ICAS framework might be developed to apply across the wider financial services sector in addition to non-life insurers.

4. To assist in developing enhanced regulatory requirements for non-life insurers the FSA commissioned an actuarial study from the actuarial from Watson Wyatt. This will be published in July as part of the consultation process for CP 190.

5. 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.

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