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Cash change could hit the reinsurers

Protection premiums to fall if FSA frees cash reserves for life offices

Reinsurers could lose their hold over the protection market and premiums could fall if the FSA relaxes its rules surrounding capital adequacy reserves for life companies.

The FSA’s consultation paper, CP06/16 Prudential Changes for Insurers, is proposing to relax the solvency rules that require life companies to keep huge reserves of capital to mitigate potential losses.

If the proposals go through, insurance companies will be able to release some of their capital reserves to fund growth in other areas of the business.

Standard Life chief executive Trevor Matthews believes this could drive premiums down as extra capital released is fed back to the consumer.

Former Abbey chief Paul Bradshaw agrees this could be one impact and he also considers that the rules could reduce reinsurers’ hold over the protection marketplace.

At the protection review dinner in July, Bradshaw said that reinsurers’ domination of the market is detrimental to life companies and consumers.

He said the majority of protection business is supported by capital from a small number of reinsurers which help design overly complex application forms leading to an unacceptable declinature rate.

Bradshaw says: “If the detail is that the FSA is taking a more relaxed stance to capital reserves then it would remove the need for reinsurance to a certain extent. This is a trend that I would welcome. It will marginally reduce the power of the reinsurers.”

Scottish Widows protection marketing manager Nick Kirwan says: “Getting capital freed could help with innovation. I think it means we will be less reliant on the reinsurers but how far will depend on the exact rules. The reinsurers will have to start sweet-talking their insurers a bit more than they have in recent years.”

Direct Life & Pensions sales and marketing director Richard Verdin says: “It will certainly weaken the hold that some reinsurers have over some insurers. Reinsurers are potentially the only losers.”

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