Solvency coverage in some life insurance companies remains weak despite regulation by the Financial Services Authority (FSA), according to a report by the International Monetary Fund (IMF).
In its UK Article IV Consultation, the IMF suggests the quality of capital in some life insurance companies is suspect where implicit items – namely intangible assets such as future profits – financial reinsurance and subordinated debt are used to boost capital coverage of the required minimum margin (RMM).
It adds: “The use of implicit items in capital means that while the Tier I capital ratio is quite healthy, it does not necessarily reflect the strength of core capital, which comprises tangible equity.”
Despite this, the IMF suggests the outlook for the life insurance industry has improved significantly over the past three years, with some private sector participants crediting the FSA with regulating the insurance industry back to health.
It says the timing of regulation was fortuitous because reform was effected during a buoyant period for capital markets, notably rising equity prices.
Further, the report suggests the cost of regulation in the life insurance sector is anticipated to decline with the “weeding out” of weaker companies.
Joseph Eyre, press officer at the FSA, says it only introduced its capital requirements in the form of the Individual Capital Adequacy Standard (ICAS) at the end of 2004 and life insurance companies “don’t improve their capital overnight”.
But, he states the FSA has taken “significant steps” to ensure the quality of capital is appropriate and is “much more confident” in life insurance companies as a result.
Moreover, he points out a report into the with profits sector in July 2005 showed firms’ aggregate surplus assets over liabilities had improved by 16% between June 2004 and the end of 2004, while the working capital had increased by 8%.
But Ned Cazalet, principal of Cazalet Financial Consulting, questions where the IMF got its data from because documents about each firm’s capital adequacy are not made public.
In addition, he says the FSA is understood to only be half way through its filing of Individual Capital Assessment reports, and there is no available information about the life companies’ year-end results yet.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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