The FSA introduced a more risk-based approach to calculating capital by requiring firms to take an integrated view of the risks that they face as insurers and how much capital they should hold against them. This means that the capital held by insurance companies will be more closely matched to the risks of the business that they write. As a result, consumers will enjoy greater protection as firms make more accurate and appropriate assessments of the capital they need to cover their liabilities.
David Strachan, the FSA's sector leader for insurance, said: "The new capital requirements lie at the very heart of the FSA's reform programme for UK insurers. The introduction of the new requirements tomorrow marks the culmination of extensive work by the FSA, insurance companies and their trade bodies. They place much greater emphasis on the need for all insurers to analyse their businesses and hold capital in line with their analysis.
The new capital framework will ultimately lead to a stronger and healthier insurance industry; and it will increase consumers' confidence that insurers are managing their risks effectively and are therefore better able to meet the commitments that they have made to their policyholders."
Large firms writing with-profits business will be required to hold capital equivalent to the greater of their statutory requirements and a new realistic calculation of their expected liabilities. General insurance companies will continue to meet the statutory solvency requirements but will also provide a risk-based enhanced capital calculation to the FSA on a private basis. In addition, all firms will be required to make their own assessments of their capital needs (Individual Capital Assessments). These, in turn, will be used by the FSA to give firms individual capital guidance (ICG) reflecting our own view of the capital required to support their individual business profiles.
The new capital requirements form the penultimate part of the FSA's review of the insurance industry known as the "Tiner Review" which was started in 2001. A range of key reforms have been delivered during the course of the review. These include:
-the introduction in April 2004 of statements of Principles and Practices of Financial Management (PPFMs) to increase the transparency of the management of with-profits funds;
- placing greater emphasis on the responsibility of the boards of insurance companies for ensuring that with-profits funds treat policyholders fairly, by removing the role of the "appointed actuary" and replacing it with two advisory functions.
The final component of the Tiner Review will be put in place in the summer of 2005, when the new rules and guidance for treating with-profits policyholders fairly take effect. These will address issues such as the charges levied on those leaving with-profits funds early, target ranges for payouts and the closure of open funds. They will also introduce consumer friendly PPFMs to provide policyholders with important information in a more accessible format about how their with-profits fund is being managed.
