Modification by consent of INSPRU 3.1.46R
This modification concerns the assumption made by realistic basis life firms in respect of their with-profits business for the investment returns on sterling sums expected to be invested or reinvested in future. It modifies the maximum that applies to this assumption to the greater of the forward gilt yield and the forward rate on sterling interest rate swaps after reduction to exclude compensation for credit risk.
We have identified that, without modification, the above rule may require a level of prudence in some circumstances which is greater than necessary to secure adequate protection for policyholders. Allowing the reinvestment assumption to reference the forward sterling interest rate swap rate as well as the forward gilt yield provides more flexibility to firms to use appropriately prudent assumptions in varying conditions such as those being currently experienced. We believe that this flexibility is appropriate on an ongoing basis and will consult on a permanent change to the rule in 2009.
Which firms does this apply to?
This modification is only available to realistic basis life insurers in respect of their with-profits business. The modification does not change the requirements under the realistic peak to which realistic basis life firms are subject. The realistic peak provides assurance that with-profits policyholders continue to be adequately protected and treated fairly.
What is the modification for?
Under this modification, realistic basis life insurers will be able to set assumptions about future yields when calculating the interest rate to be used in determining mathematical reserves by reference to the greater of the forward rate on sterling interest rate swaps, reduced to exclude the compensation for credit risk, and the forward yield on gilts. The relevant forward rates and yields are those for investment at the time a sterling sum is expected to be received, the greater of the rate and yield at each duration forming the maximum investment return assumption for investment or reinvestment at that duration. We consider that this additional flexibility will enable an appropriate valuation of liabilities to be made in a wider range of circumstances. This helps to ensure that the financial strength of realistic basis life insurers is not understated and that firms are not put under undue pressure to raise more capital or to take action to reduce the risks in their with-profits business which may damage policyholders’ interests.
How does the modification work?
The modification changes the maximum set by the rule from the forward gilt yield to the greater of the forward gilt yield and the forward sterling interest rate swap rate reduced to exclude compensation for credit risk.
This change can be seen in the modification direction direction [PDF].
Firms should note that the modification contains a condition that an appropriate note is added to the firm's financial returns.
This modification remains valid until 31 December 2009, or until an earlier date when we have amended or replaced INSPRU 3.1.46R.
How can firms make use of this modification?
If you want to take advantage of the modification by consent described here, you should email to: centralwaiversteam@fsa.gov.uk
Or alternatively write to:
Central Waivers Team
The Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS
We will then write to you to confirm that the modification has been granted, and we will publish each modification direction we grant on our website.