The recent falls and continued volatility in equity markets have reduced the solvency of UK life off...
The recent falls and continued volatility in equity markets have reduced the solvency of UK life offices, resulting in a 2% decline in free asset ratios (FAR) in 2002, according to financial consultants Mercer Oliver Wyman.
Despite this decline, the firm said, concern over the financial solvency of the sector is exaggerated and if all life offices made maximum use of their future profits, the average FAR at year-end 2002 would improve to 6.5%.
Anthony Stevens, head of insurance practice at Mercer Oliver Wyman, said while the statutory FAR provides a good initial basis for examining solvency, it suffers from a significant drawback relating to the rules governing the statutory valuation of insurance companies.
A realistic FAR measure includes the additional reserves for terminal bonuses on conventional with profits business, the cost of smoothing and the cost of guarantees, he said.
Stevens added the FSA has allowed a gradual introduction of the realistic FAR measure, which, combined with rapid cuts in bonus declarations, has prevented a signification deterioration in the realistic solvency position of life offices and thus prevented a wholesale selling of equities.
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