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Regulator in warning on squeeze facing life companies

The FSA says the life insurance industry faces a squeeze on profits because people are not buying enough long-term savings products.

In its prudential risk outlook, published last week, the regulator says the sector was collectively profitable in 2009 but legislative and regulatory pressures will hit the industry.

The report says: “UK life insurers face a number of medium to long-term pressures on profitability, including persistently subdued demand for long-term savings products, increased competition from other types of savings and investment pro- ducts and regulatory and legislative changes.”

New business for the sector is up by 5 per cent but the report says increased annuity payouts, the decline of with-profits policies and the subdued market for savings products are responsible for a long-term decline in net cashflows. It also warns that lower investment returns due to the current low interest rates strengthen the need for prudent underwriting and reserving, although it adds that the sector’s capital position is “sound”.

The report added that high levels of debt in parts of the household and corporate sectors will leave the UK vulnerable to economic shocks.

Solvency II, which will come into force in 2013, will impose capital requirements on the insurance sector and aims to realign the regulatory requirements firms face with the risk they are exposed to.

The Association of British Insurers refuses to comment on the report’s findings but a spokeswoman downplays concerns about the insurance sector, saying: “There are 95 pages on banks and three on insurers.”

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  1. As a first step, high levels of debt could be addressed by the regulation (and restriction) of unsecured borrowing. It does seem perverse that it’s hugely more difficult to get a secured loan, typically against a property, than to rack up almost limitless debt on an assortment of credit and store cards. Why not stipulate that unsecured borrowing may not exceed three of four months’ nett income? When you reach your limit, that’s it ~ no more credit.

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