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Are UK Insurers Exposed to US Sub-prime Losses too? Print E-mail

30 Sep 2008 - with more and more companies announcing huge losses in their exposure to U.S. sub-prime crisis, are UK Insurers in danger too?

The answer is unlikely. Why? UK Financial Services Authority (FSA) operates a strict management regime where the guarantees and current terminal bonus levels can only be covered by "admissable asets". The list of these assets is very prescriptive and for example, life offices cannot hold assets such as sub prime debt in their admissible assets.

 This view is reinforced by a report by Fitch, the Credit Rating agency, last year which concluded that "US sub-prime mortgage exposure is not a significant direct risk for the European insurance industry".

In addition to this, UK Insurers must be able to satisfy numerous "stress test" scenarios. These are risk situations that cover economic, political and environmental scenarios. It means that they must be able to meet their liabilities even in the event for example, of a severe market downturn.

These "stress test" requirements must continue to be met every day - even after the extraordinary events of recent weeks!

Lastly, with-profits investments (such as UK Traded Endowments) are underwritten by the Financial Services Compensation Scheme - a government backed scheme that guarantees to pay out 90% of the sum assured and existing bonuses of each policy in the event of a life office failure. Unlike banking protection, this cover has NO Upper Payment limit.

 
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