FSA to Check Life Assurers For Insolvency Protection

The Times - 15 October 2008

The City watchdog is to closely examine the solvency levels of the UK's assurers amid concerns they are under pressure

The City regulator has stepped up its scrutiny of leading life assurers amid concerns that crumbling investment markets are putting their solvency levels under pressure.

Supervisors at the Financial Services Authority (FSA) are also concerned that insurance companies are not stress-testing their exposures hard enough to take account of market shocks.

FSA officials will visit life company offices for a case-by-case analysis of the way they protect themselves against their investments going wrong. Aviva, which owns Norwich Union, Legal & General, Friends Provident and Prudential have all been contacted by the regulator over the past fortnight.

Despite sustained falls in the equity and property markets and the volatility of bonds, there is no suggestion that any UK insurer is in danger of becoming insolvent.

However, the FSA is worried that insurers may not be factoring in the heightened risk of defaults on corporate bonds when they calculate how much capital to set aside to cover their investment risks.

It says that it has seen instances where insurers have not properly stress-tested their exposure to the market for securities backed by assets such as mortgages.

“We are following up with the insurers the issues we raised with them in September. It is not just a question of the quantum of their regulatory capital - there also needs to be an understanding of risks, controls and stress-testing,” the FSA said.

Britain's biggest insurers have stood up well in the financial crisis, the biggest test of their strength since 2002, when falling equity markets threatened to make several insolvent.

Since then the regulator has tightened the rules governing how much capital insurers have to hold. The insurers have also reduced their exposure to equities and taken steps to hedge their positions.

Yesterday life companies shook off suggestions that their solvency levels were a cause for concern.

Aviva, the largest, said late last week that it had £1.9billion of surplus capital at the end of last month. It said that after increased hedging, even if equities lost a further 40 per cent, that surplus would fall by only £700million.