Non-life insurers may have to consider raising new capital or reduce the underwriting risks they exp...
Non-life insurers may have to consider raising new capital or reduce the underwriting risks they expose themselves to, says the Financial Services Authority, under new requirements to provide greater detail about their risk and solvency position.
Changes to the capital requirement regime are being implemented, says John Tiner, managing director of the FSA, to "help head off future financial failures in the sector", particularly after the collapse of Independent Insurance last year when there appeared to be no indicators or warnings that the firm would go under.
"For some non-life insurers the new requirements will have only a modest effect because they hold capital well in excess of the proposed requirements either for strategic reasons, risk sensitivity, to fund expected growth or for credit rating purposes," says Tiner.
"However for other non-life firms it could require them to respond by either raising new capital or by reducing the risks they face or underwrite," he adds.
When Independent Insurance went into liquidation last year, it left many consumers without any protection, and in some cases left companies - such as one Formula One racing team without suitable insurance cover - unable to operate until new cover was found.
So, as a result of the changes proposed in CP190 Enhanced capital requirements and individual capital assessments for non-life insurers , companies will be expected to provide details for a new risk-based enhanced capital requirement (ECR), which looks specifically on the firm's asset and insurance risks.
This will then allow the FSA to provide individual capital guidance (ICG) and tell firms how much they would be expected to hold as a minimum capital requirement, says Tiner, soon-to-be chief executive at the FSA.
"While there have been very few failures among UK general insurers in the retail market, the failure rate amongst London market insurers over the last 20 years has been too high, continues Tiner.
"Weak capital requirements and management practices played a major part in this. Capital is a major mitigator to the risk of insolvency and we believe that our proposals for better calibrated and more risk-sensitive capital requirements will lead to a better regime for non-life insurers aligned more closely to the risks underwritten and allowing for earlier regulatory intervention when financial problems develop," adds Tiner.
Plans set out in CP190 follow previous prescribed standards proposed in CP136 published in May 2002 and are part of the FSA's wider move to set individual capital adequacy standards (ICAS) for regulated firms.
Specific proposals for capital adequacy requirements on life insurers will be published by the FSA later this summer, while other sectors, such as deposit taking and investment firms, will be given their guidelines sometime in 2004.
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