The FSA has published its risk-based capital requirements for insurance companies.
The requirements, which will be finalised by the end of 2004, are applicable to life insurers' with-profits funds, non-life insurance companies and reinsurers, and will ensure that the capital held by insurance firms is more closely aligned to the risks of the business that they write, said the FSA.
Non-life insurers will continue to meet the statutory solvency requirements (based on EU Directives), but in addition will provide a risk-based enhanced capital calculation to the FSA on a private basis.
Large firms writing with-profits business will be required to hold capital equivalent to the greater of their statutory requirements (based on EU Directives) and a new realistic calculation of their expected liabilities, it said.
All firms will be required to make their own assessments of their capital needs (Individual Capital Assessments). These will be used by the FSA to give firms individual capital guidance (ICG) reflecting its view of the capital required to support their individual business profiles.
The rules are available at www.fsa.gov.uk/pubs/policy/04_16/index.html .
The main changes from the consultation papers for non-life insurer capital requirements are:
· confirmation that the enhanced capital requirement (ECR) will, for the moment, be privately reported to the FSA and not a "hard" capital requirement. The ECR will be used both as a benchmark and as a basis for considering a non-life insurer's ICA; and
· the exclusion from the ECR calculation of insurers' investments in collective investment schemes that hold only money market instruments.
FSA sector leader for insurance David Strachan, said: “The FSA has undertaken a radical programme of reform of insurance regulation. This has sought to deal with weaknesses in the rules that we inherited on both capital adequacy and the way in which companies treat their customers.
“Today's policy statement marks a step change in the way insurance companies calculate how much capital they are required to hold.
“This is particularly important for companies which write with-profits business where provisioning and capital requirements will now be more closely linked to the payments and bonuses that policyholders expect.
“Since publishing the original proposals for consultation, we have worked closely with the industry to refine the new capital requirements, resulting in a balanced approach that will better align the capital that firms hold to the risks they run.”
