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&#39Adequacy rules may mean firms pulling out of markets&#39

The FSA proposals on capital adequacy for life offices could lead to providers pulling out of certain areas of the market and increase consolidation, warns the ABI.

The FSA last week issued CP136, Individual Capital Adequacy Standards, which proposes moving from a one-sizefits-all approach to a risk-based system reflecting the type of business being written. The FSA says this would effectively mean that for riskier business such as GARs, life offices will be expected to reserve more against their exposure.

But the ABI warns that many offices may have trouble raising the necessary capital to satisfy the FSA, especially if the market senses that they are in trouble. It says this could lead to life offices pulling out of product areas, which would speed up consolidation in the marketplace.

The ABI says the FSA will not be able to pursue every life office so it will focus on the biggest providers because “it matters more if they fail”.

FSA spokesman Robin Gordon Walker says: “Depending on the lines of business you are in, the more you have got to demonstrate that you have the right capital resources.”

ABI head of financial regulation Peter Vipond says: “It is precisely when you have taken a big hit that they are likely to come along and say you do not have enough capital. With more robust regulation of this kind, you could get to the situation where some providers are pulling out of some types of business or seeking consolidation.”

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What employers should expect over the next five years

A major feature of our articles is looking into the Jelf Employee Benefits crystal ball to predict changes and trends that may influence the short and medium term shape of UK employee benefits.  By flagging such changes early we aim to provide our followers with the tools to make sensible and informed decisions on their benefits offerings.

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