The Financial Services Authority is planning a major shake-up of its capital regime for non-life insurers designed to help head off future financial failures in the sector.
FSA Managing Director John Tiner said: "While there have been very few failures amongst UK general insurers in the retail market, the failure rate amongst London market insurers over the last 20 years has been too high.
"Weak capital requirements and management practices played a major part in this. Capital is a major mitigator to the risk of insolvency and we believe that our proposals for better calibrated and more risk-sensitive capital requirements will lead to a better regime for non-life insurers aligned more closely to the risks underwritten and allowing for earlier regulatory intervention when financial problems develop.
The FSA said that the new regime for non-life insurers will have two key features: a new risk-based enhanced capital requirement. This will be based on a capital charges to be applied to asset and insurance risks; and individual capital guidance to firms based on the FSA's own view of how much capital would be adequate for individual firms to hold taking into account firms' assessments of their own capital needs.
John Tiner said: "We plan to introduce the ECR in a phased way so that initially it will be a reporting requirement and only become a prudential requirement later. This is so that we can consult carefully on how the ECR is calibrated, assess its effect on individual firms, and allow time for the market to absorb the changes without stress.
"For some non-life insurers the new requirements will have only a modest effect because they hold capital well in excess of the proposed requirements either for strategic reasons, risk sensitivity, to fund expected growth or for credit rating purposes. However for other non-life firms it could require them to respond by either raising new capital or by reducing the risks they face or underwrite."
Consultation paper 190 - enhanced capital requirements and individual capital assessments for non-life insurers - is available on the FSA website at www.fsa.gov.uk.
