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A consumer&#39s view

It is difficult to know whether to be reassured or alarmed at the findings of the Tiner report on the regulation of the insurance industry. The revelation that life companies&#39 with-profits free-asset ratios had fallen to an average of 6.3 per cent by the end of last year – the lowest level since the present method of calculation was introduced in 1989 – must mean that some companies&#39 free-asset ratios are below this level. Not a happy thought.

At the end of last year, the FTSE 100 index stood at 5,000. It is now struggling to get back to 4,000, reflecting a 20 per cent drop over the past 12 months, so the situation is now significantly worse than when Tiner carried out his survey. In this situation, it is difficult to see how any IFA can honestly recommend new investors to take out a with-profits policy.

If the stockmarket does not pick up before the end of the year – which seems highly unlikely given the global economic gloom and President Bush&#39s sabre-rattling over Iraq – there are going to be a few shotgun marriages forced on insurance companies which cannot meet their solvency requirements. The worrying aspect of this is who is going to take on these liabilities?

The ABI&#39s comment last week on the Tiner report looks more hopeful than confident – akin to an industry whistling in the dark to keep up its spirits. “We are pleased that the FSA has confirmed its confidence in the financial strength of life offices,” says director general Mary Francis.

That is not exactly how most IFAs and the public are likely to see the Tiner report.

The further comment: “We believe that the FSA should press on with its review of realistic liabilities so that more accurate market numbers can be used in the near term for regulatory purposes,” is a tacit admission that no one knows what the hell is going on.

One industry insider, who knew of Equitable Life&#39s problems before they became public, was convinced that Equitable&#39s management had simply forgotten that they had written contracts with guaranteed annuities until the first claims were made. How many more skeletons might there be in life companies&#39 cupboards in the form of long-forgotten liabilities written years ago?

In the Tiner report&#39s introduction, it spells out that “insurance companies are facing a fundamental change in the way they are regulated, including a more pro-active and challenging regulatory relationship”.

Most important, it goes on to say that the new approach will mean that insurance company management will have to employ “more openness with regulators and consumers, increased responsibility and accountability for senior management and greater awareness of the impact of their actions on consumers”. This is good news if it is implemented. But it will be an uphill struggle to break down generations of arrogance and complacency, which have been the hallmark of life company management.

You only have to look at the contempt with which Standard Life treats all criticism of its management style to see how much needs to be done. Corporate governance of life companies leaves much to be desired.

The public might find this new approach by the FSA more convincing if a few members of the former Equitable Life management were brought to court to face charges of incompetence and gross negligence. Heads must roll if confidence in insurers is to be restored.

For far too long, life companies have been run for the benefit of senior management with almost complete disregard of policyholders&#39 and members&#39 interests. If the stockmarket collapse and impending solvency crisis achieve the long overdue shake-up of management and shed light on the opaque accounting practices used by the industry, there will have been some beneficial effect.

Effective regulation of the industry is vitally important and is probably the biggest challenge the FSA will face. The regulators would do well to ignore the vested interests which have always stood in the way of reform in the past. The importance of the life industry and its position as the guardian of the nation&#39s long-term savings means that the FSA cannot afford to get it wrong.

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