The FSA has unveiled plans for life offices' capital requirements which link reserves with smoothing.
The proposal would means that the more smoothing an insurer carries out, the more capital it would have to hold.
The FSA claims this would reduce pressure on with-profits funds to sell equities when stockmarkets fall as the capital requirement on the company will also fall in line with its ability to adjust bonus payments to policyholders.
The move is described as a refinement of an approach outlined in earlier consultation papers and in the Tiner report, which was used as the basis of waivers granted earlier this year to some life offices.
Insurers with big with-profits funds would have to make two calculations to determine the minimum amount of capital to hold.
This includes a modified version of the current calculation and a new “more realistic” calculation. Life companies would have to hold enough capital to cover whichever calculation is greater.
At the same time, the FSA will be able to set higher capital requirements if the insurer has higher risks.
The proposal also includes a requirement that insurers publish the statutory and realistic figure once a year, with a further update to the FSA on realistic figures every six months. Life insurers will have to carry out their own self-assessments on the capital they hold.
FSA prudential standards division director Clive Briault says: “These proposed rules will provide a more appropriate and sensitive calculation of regulatory capital requirements for life insurers, especially those with big with-profits funds.”
ABI head of financial regulation and taxation Peter Vipond says: “If there are volatile markets in the future, returns to customers will have to reflect this reality but these proposed changes will mean that capital can be better used to sustain returns to shareholders and policyholders alike.”