Life offices are to adopt a more realistic model for building reserves, based on the risks in indivi...
Life offices are to adopt a more realistic model for building reserves, based on the risks in individual funds rather than using a blanket formula.
In a consultation paper released last week, the FSA has proposed a more flexible model on which to base reserves, allow ing groups to adjust more easily to changing conditions, such as bear markets, without having to sell underlying assets.
At a minimum, groups will have to hold at least 4% of assets over and above their liabilities, based on existing EU requirements. However, the FSA is now proposing groups calculate reserves taking into account risks to the group and fund, such as a bear market, and discretionary payments from the fund, such as bonus payments.
Whichever of these two requirements is more stringent is the one life offices will have to follow. The model, which the FSA hopes to have in place by mid-2004, will mean, for example, if terminal bonuses, which are not guaranteed, fall due to adverse market conditions, companies can correspondingly lower the amount needed to reserve.
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