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Life offices face upheaval in Baird bid to update solvency

Life offices are braced for the biggest regulatory shake-up in years following sweeping recommendations from the FSA&#39s Equitable inquiry on solvency requirements.

The recommendations are part of the Baird report on the FSA&#39s handling of Equitable Life. They could see current practices scrapped, including the use of future profits and reinsurance contracts to boost headline financial strength.

FSA director of internal audit Ronnie Baird&#39s concerns follow Equitable&#39s use of £1bn of future profits and an £808m financial reinsurance treaty to reduce its liabilities and create the appearance of solvency.

Those using future profits in 2000 include Friends Provident (£600m), Guardian (£125m), RNPFN (£100m), Scottish Equitable (£375m), Scottish Mutual (£300m) and Sun Alliance & London (£78m).

Companies using financial reinsurance include Clerical Medical (£500m), Friends Provident (£627m), NPI (£300m) and Sun Alliance & London (£413m).

The recommendations are part of a wholesale review of life office regulation. The FSA is not making final proposals until next year. Some believe statutory free-asset ratios as a measure of financial strength could be discarded.

Scottish Equitable welcomes the recommendations, saying the current regime is based on outdated economic circumstances. It is calling for a more technically sound app-roach which would remove the need for implicit items such as future profits.

FSA spokesman Rob McIvor says: “The situation with Equitable has shown there is a difference in the financial reports given to consumers and the returns to the regulator. There are flaws in the system which need to be addressed but we will not change regulation overnight.”

Cazalet Financial Consul-ting principal Ned Cazalet says: “Too many companies play to the lowest level of requirements. Future profits is not real money on the books and reinsurance is a method of parking liabilities elsewhere. The FSA&#39s new approach will see the torch shone on those offices which have poor reporting systems and play to the letter of the law.”

Clerical Medical appointed actuary Adrian Saunders says: “We had strong free assets anyway and reinsurance was more for presentation purposes. But I would not feel comfortable relying on reinsurance to demonstrate minimum solvency.”


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Peter Barrett

Lives: Buxted, East SussexBorn: 1966, West SussexEducation: Left comprehensive school to go to college in East Surrey to study for a diploma in business studiesCareer: Started with admin role with subsidiary of Signa US, Crusader Insurance, In 1989 joined Inter-American International as a director of offshore operations. In 1990 set up his own brokerage in […]

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