The FSA plans to extend rules governing unit-linked and index-linked policies to bring them in line with Solvency II.
It published a consultation paper on Solvency II and linked long-term insurance business this week.
Under Solvency II, firms will no longer be restricted to the list of assets previously prescribed for designing linked policies. However, member states can restrict the assets to prevent policyholders from “inappropriately high levels of risk”.
The FSA has decided to impose certain restrictions on the assets used.
It has proposed to expand the list of assets which can be used to back linked policies to include assets allowable in Ucits funds that are not currently allowed under conduct of business sourcebook rules.
Assets that will be allowed include approved securities, listed and unlisted securities, deposits and cash, money market instruments held by an insurer, and collective investment schemes. Residential mortgage-backed securities will not be allowed.
The UK unit-linked long-term life sector has managed assets of £815bn, with a further £24bn of assets relates to index-linked policies.
FSA director of policy Sheila Nicoll says: “While regulation cannot protect policyholders from market movements, these rules are designed to ensure that they can be confident their money is being invested prudently.”
The FSA expects that the revised rules will be introduced as Solvency II is fully implemented.