Up to 60 smaller insurers face `agony' of meeting three-times capital cover

The FSA's proposed capital requirements rules will cause massive problems for about 50 to 60 smaller insurers, say industry sources.

The second consultation paper requires general insurersto have average capital coverage of three times.

Sources say smaller firms just do not have the cover.

Insurance specialist FSA Solutions director Alexandra Peterkin said: "It's going to be agony for smaller firms."

And she warned that onerous capital requirements could impact on capacity for high-risk.

"If they can't meet the capital requirements of writing high risk business, many insurers may adjust their risk profile, compounding the lack of capacity that already exists."

The capital requirement, or required minimum margin (RMM), will be calculated using each insurer's risk profile.

As a result, the RMM will vary between insurers, and those with large exposures to long-tail risks or higher-risk business may face capital coverage requirements of four times or more, sources said.

The FSA will also reserve the right to impose additional capital requirements. This could occur when the RMM, calculated internally by insurers based on their risk profile, is lower than a standard minimum margin. This is calculated by the FSA using a formula.

In its paper, Financial risk outlook 2003, released in January, the FSA said general insurers' capital cover fell from more than six times in 1998 to four times by the end of 2001.

It acknowledged that the weak investment market performance and losses from 11 September further eroded capital cover during 2002.

The consultation paper is due to be released at the end of April.