Much has been written and speculated about the life industry's financial health at present. Some life offices have taken the opportunity to apply for a waiver of the current solvency requirements laid down by the FSA and this, in particular, has sparked a bit of debate. There seems to be a perception that application for a waiver should be viewed negatively. This is simplistic and in the main nonsensical.
The sentiments expressed in the FSA letter to all chief executives of life companies at the end of January were welcomed by the industry. The FSA plans to move away from the current conservative method of calculating life office solvency reserves and introduce a more realistic risk-based approach in 2004 – something many in the industry have been vocal about for a number of years.
Although free assets, as measured under existing solvency rules, are an important indicator of a life company's financial health, they are by no means the only indicator. For example, they are only one of the factors taken into account in the thorough checks undertaken by rating agencies such as Standard & Poor's and Moody's.
Often referred to as statutory solvency, it is clear the current measures do not represent solvency in the traditional use of the term, where a deficiency suggests an inability to meet obligations.
The effects of the mechanics of the existing FSA rules in downward spiralling markets are well documented. Life offices – critical players on the stockmarket – become pressurised to sell equities as equity prices fall, even though they may reasonably consider holding equities to be prudent and good value for policyholders in the longer term. These sales cause further falls which in turn trigger additional selling and a downward spiral in equity market prices leads to a wider economic downturn.
The balance that is being looked at by the FSA is between the measurement of solvency on a conservative basis and a more realistic approach appreciating the wider – and truer – aspects of a company's operations. Consistency is also fundamental and currently lacking. The market needs to be able to place faith in a measure that is comparable beyond any doubt across the breadth of the players. Transparency, stability and predictability evidencing strength will continue to win the hearts and minds of a more informed and shrewder buyer.
Even leaving aside the current turbulent equity markets and other unstable economic factors, the winds of change sweeping through the industry will dictate that a lot of provider capacity will be taken out in the oncoming years. At the same time, a spark of positivity and an economic upturn allied to better and more consistent and trusted measures of solvency will release a significant flow of pent-up demand, particularly from the individual investor who has been conspicuous by his increasing absence over the last couple of years.
What must emerge from FSA is proper protection for the consumer and a stronger proposition from the industry. The industry must work closer with the Government and consumers to deliver the right kind of products and advice to the market to eliminate the savings gap.
Aegon UK, along with many strong providers, whether or not they have applied for solvency waivers, is in good shape to make a major contribution to that proposition and our aim is to do so.
Peter Dornan is director of group businesses at Aegon UK