Insurers under estimated their regulatory capital requirements by a total of £9bn, a review by the FSA has found.
The FSA said that 50% of companies had failed to make a “sufficiently robust” assessment of the amount of capital they needed to hold, known as the individual capital assessment (ICA).
A failure to assess adequately the risks posed by fraud, outsourcing, poor governance and other operational risks were highlighted by the FSA as some of the main reasons for underestimating capital requirements.
As a result, insurers had to increase their capital by an average of 14%. This represented an overall capital increase of £9bn against companies’ own capital assessment of £65.9bn in total.
A spokesman for the FSA said in nearly all cases insurers had the additional required capital available.
The findings were the result of the FSA’s first review of insurers’ capital assessments under its new risk-based capital regime.
The reviews found that insurers had taken a significant step forwards to delivering more risk-based capital management.
Sarah Wilson, insurance sector leader at the FSA said: “The industry is now in a better position to face the challenges of Solvency II which is likely to require insurers to use their own risk modelling as an integral part of their management,”
Solvency II, a Europe-wide directive on supervision and capital requirements, is not expected to be in place until 2012. Its implementation is predicted to cost around £2bn.
Peter Vipond, ABI director of financial regulation and taxation, said: “The FSA’s briefing paper will help insurers as they prepare for Solvency II, where they will face a tougher internal model approval process, though one built on the current experience of ICAS.
“We are working to ensure the UK insurance industry is well placed to receive the full benefits of the Solvency II regime from day one.”