UK life insurers upped their free asset ratios to an average of 14.8% in 1999, according to insura...
UK life insurers upped their free asset ratios to an average of 14.8% in 1999, according to insurance rating agency AM Best.
AM Best based its analysis on figures provided in the 1999 FSA returns of UK life insurers covering 38 life offices, three of which were friendly societies, and noted an increase of 3.1% from the 1998 figure.
Mike Hooton, senior financial analyst at AM Best, said the 1999 rise was largely a result of high interest rates and strong equity markets at the end of the year but current stock market volatility is now threatening the strength of the UK life insurance market.
He added the strain of ensuring adequate reserves are in place to meet liabilities incurred from guaranteed annuity contracts became less onerous at the end of 1999 than it had been at the end of 1998.
Royal London recorded the biggest rise in free assets, reclaiming its position as the life office with the highest ratio after being overtaken in 1998 by Liverpool Victoria following three years in first place.
The company had a free asset ratio of 34.8% compared to Liverpool Victoria's 25.5%. Equitable Life, which recently put itself up for sale after being told it must pay the full guarantees on annuity contracts it sold, had a free asset ratio of 5.5%.
Free asset ratios consistently near or above 20% can be interpreted as signifying a sound financial position, according to Hooton but he warned questions should be raised about the financial strength of offices whose free asset ratios are consistently around or below 10%.
He added: "There may be a good explanation for a lower ratio such as a particularly strong valuation basis, the maturity and mix of business written or the existence of parental support allowing the business to be run on a leaner capital base. However, without an adequate explanation, such offices should be treated with caution."
Free asset ratios are an important measure of a life office's financial strength and are measured by contrasting their excess assets above those needed to cover their liabilities, plus the required minimum solvency margin, compared with the office's total asset values.
Free assets give a life office flexibility by ameliorating the demands of writing capital intensive new business and allowing offices to absorb the fluctuating values of underlying assets more easily as well as smooth annual bonus declarations on with-profits policies. Continued low inflation and interest rates, together with increased stock market volatility, will continue to threaten the strength of the UK life insurance marketing, Hooton said.
The introduction of low-charging structures begun by the introduction of Cat marks and stakeholder pensions along with the prospect of the UK entering the European Economic and Monetary Union will also continue to exert downward pressure on free asset ratios, according to Hooton.
He also expects free asset ratios to reduce at the end of 2000 with stricter valuation regulations being introduced for unitised with-profits business plus the cost of mis-selling reviews into pensions, free standing AVCs and endowments.
He said: "Only the strongest offices can look forward, confident of survival on their current form while weaker offices will be prime candidates to be acquired by stronger competitors."
Only four of the 38 offices had lower free asset ratios at the end of 1999 than at the end of 1998. They were Britannic Assurance, CGU Life, Scottish Friendly and Sun Life Assurance.
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