Offshore life companies that sell with-profits operating through UK branches will be required to hold capital requirements in line with its worldwide business, following proposals by the Financial Services Authority (FSA) in the CP 195 paper.
CP 195 proposes that non-EEA firms operating through UK branches which have with-profits liabilities in excess of £500m will be required to calculate and hold capital in line with the 'twin peaks' approach calculated on the whole of their worldwide with-profits business.
The twin peaks approach for with-profits business links provisioning and capital requirements more directly to how bonus payments are made to policyholders in practice.
Under the proposed rules, the more smoothing that takes place, the more capital with-profits life insurers will have to hold. This is intended to reduce the pressure on with-profits funds to sell equities when the stock markets fall as the capital requirements will also reduce as a reflection of their ability to adjust discretionary payments downwards.
The proposed rules would require life insurers with large with-profits funds to undertake two calculations to determine their minimum regulatory capital requirement ' a modified version of the current calculation and a new, more realistic one which takes into account discretionary payments more explicitly.
Life insurers would then have to hold enough capital to cover whichever calculation gave the higher result. Under the proposals, companies would publish both the statutory and realistic figures once a year. They would also submit a further update on their realistic figures to the FSA every six months.
According to a spokesperson from Prudential, the proposals build on the FSA commun- ication of realistic balance sheets. Prudential manage its with profits business with realistic balance sheets and there will be no difference to off- shore business.
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