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FSA issues new resilience test

The FSA has issued guidelines about a revised resilience test for life insurers, saying the existing one is not suitable to today&#39s market behaviour.

The current test requires life offices to be able meet solvency requirements even if the equity markets were to fall by up to 25 per cent.

Under the new test, life offices will have to monitor the current level and the average daily closing level over the previous three months of the FTSE All Share Index.

If the current market is lower than the recent average then the percentage change can be deducted from the 25 per cent reserve.

Should the difference be 10 per cent then life offices would have to then safeguard against a further 15 per cent.

FSA managing director John Tiner says: “It has become apparent that the existing resilience test is insufficiently sensitive to the effect of past changes in equity market prices and can in certain circumstances cause perverse asset allocation. We believe that the test should take some account of past price changes while still requiring insurance firms to ensure that their asset holdings are resilient to market developments.”

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