FSA to give directors responsibility of proving reserves can meet claims

Plans to allow insurers to set their own capital requirements for the risks they face will send tremors through boardrooms, it was forecast.

A consultation document from the Financial Services Authority (FSA) sets guidelines for capital needs, but allows insurers to set their own levels against their specific risks.

The aim is to avoid company failures, such as the demise of Independent Insurance, by ensuring that insurers have enough money to meet claims and can cope with stock market crashes.

Some insurers that are worried about controlling risks are likely to bring actuarial expertise in-house and not rely on outsourcing.

The proposals include setting broad minimum standards that insurers would then adapt to create hypothetical stress tests to examine how they would withstand investment downturns.

They would then have to assess the risk of big underwriting hits and add on sums to give a safety margin.

Regulation and compliance expert John Derry-Collins, group manager of IFAct consultancy, said the move could be good for consumers, but he warned that smaller or less well-managed insurers could face difficulties.

"It's putting a huge amount of responsibility on management," he said. "It sets out that the buck stops with the board.

"I can see a number of smaller company chairmen getting brown trousers thinking, `my neck is on the block'.

"Among general insurers the category likely to worry are those that are heavily reliant on outsourcing for actuarial calculations and risk management.

"Those companies will be looking to their human resources departments to get those skills in house where they have more control over them."

He predicted that wary managers would want to take a conservative approach to their risk portfolio to avoid being held responsible for mistakes.

But he praised the FSA's move towards tailoring regulation more closely to an individual company's circumstances.

"All companies are different and if one can encourage this difference, one encourages more innovation and competition."