non-life insurers could be encouraged to hold more cash in reserve to protect consumers from firms unable to pay out policyholders
The FSA may force general insurance providers to hold more cash in reserve to protect consumers from firms unable to pay out to policyholders.
Earlier this month, the regulator flagged the introduction of a risk-based enhanced capital requirement (ECR) for non-life insurers, made up of capital charges on asset and insurance risks.
The FSA said the ECR, detailed in Consultation Paper 190 released on 15 July, would typically increase the minimum regulatory capital firms must hold under the European Directives on capital adequacy.
The new rules would be phased in so initially this would only be a reporting requirement, becoming a prudential requirement later on. The dates for introduction would be decided in 2004, with at least 12 months' notice of any regulatory changes.
The new regime would also allow the regulator to give individual guidance to firms if its assessment of capital adequacy exceeds the minimum regulatory capital.
FSA managing director John Tiner said while the new requirements would have only a modest effect on some firms because they already hold capital in excess of the proposed requirements, other non-life firms might need to respond by either raising new capital or reducing the risks they face or underwrite.
The ABI supports the move towards a more risk-based capital approach for general insurers. Peter Vipond, head of financial regulation and tax at the ABI, said: 'It is right to align capital requirements to the risk profile of an individual business. If this reform is implemented in the right way, the UK can be confident of being well-prepared for future EU solvency legislation.
'However, the application of these new rules will have to be carefully considered and we are pleased the FSA will be consulting fully with the industry. We are working actively with the FSA on these important proposals.'
An ABI spokesman said it is too early to say how much the new capital standards might cost insurers or consumers or whether they would lead to hikes in premiums.
Chris O'Brien, director of the centre for risk and insurance studies at Nottingham University's business school, said while the FSA has recognised the risks facing insurers, the proposals are a rather unsophisticated way of addressing the problem.
However, the increased disclosure requirements on capital adequacy are a positive in that they would make it easier for consumers to assess the health of insurers, he added. The consultation period closes on 30 November.
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