The FSA is easing regulatory solvency margins as it admits that life companies are pressing or failing the requirements in the stockmarket slump.
In a letter sent to chief executives of all life insurers last Friday, FSA managing director John Tiner says the move is to avoid panic dumping of equities when the markets fall as life offices try to preserve regulatory margins.
He writes: “There is a risk that these sales cause further falls which, in turn, trigger additional selling and a downward spiral in equity market prices.”
He said companies could apply for a waiver but weaker companies should submit plans, such as a capital injection, closure to new business, sale or transfer of business or a reallocation of assets.
For regulatory purposes, firms are required to have a safety buffer of 4 per cent of assets over liabilities. The FSA has already indicated a move towards greater reliance on “realistic” solvency rather than inflexible regulatory minimums by 2004.
The news follows a round of downgrades of insurance companies by Standard & Poor's, with both Standard Life and Prudential losing their AAA rating. Legal & General keeps its AAA rating but is put on negative outlook.
Tiner writes in the letter: “In considering requests for waivers, we would take into account the firm's realistic position. This would help us satisfy ourselves that, if the waiver were to be granted, there would be no undue risk to consumers.”
ABI director general Mary Francis says: “This should ensure insurers will not have to sell equities when that is not in the best long-term interests of their policyholders.”