The FSA has warned UK insurers are taking bigger risks to maintain high investment returns in an era of low interest rates and adds it will intervene if the solvency of with-profits funds is seen as under threat.
In a speech at the PRA Insurance conference yesterday, FSA director of insurance Julian Adams said the low interest rate environment “threatens to undermine the value proposition of insurers”.
He said: “A particular challenge for insurers is, of course, the low interest rate environment. An environment which, given the ongoing weakness in the UK and European economies, seems likely to persist.
“We are aware of course that this is a major challenge to some of our European counterparts where insurance companies have been more frequently engaged in writing guaranteed products. Nevertheless it raises issues for the UK market also. The affect on annuities has been well publicised, but it provides a challenge to all areas of insurance with reliance on investment income.”
Adams also said the FSA will intervene “decisively” if the solvency of with-profits funds is under threat, although he stressed he did not expect this to be a routine occurrence.
He said: “Our core policyholder concerns revolves around the solvency of an insurance company to meet its liabilities to policyholders as they fall due – over the coming year and over the longer term – and in a variety of stressed states of the world. This is our focus.
“And so where the solvency of the fund may be compromised to an extent that we believe challenges our prudential objectives, then the PRA will intervene in a decisive manner and has the ability to veto a proposed course of action on annual or terminal bonuses.”
Adams said the FSA will look closely at insurers’ changing portfolios and the management of risk when moving into new asset classes.
He said: “We are already aware of changing investment portfolios as some companies chase yields and diversify away from traditional fixed income securities. Where this involves moving into new asset classes, it is crucial that the new risks this strategy presents are fully understood and that investment is made in a suitable control structure.
“This is a major challenge to some of our European counterparts where insurance companies have been more frequently engaged in writing guaranteed products. It raises issues for the UK market also.”