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Survey urges caution over WP balance sheets

The FSA&#39s push towards realistic balance sheets for with-profits life offices is welcome but a degree of caution as to how the figures will be interpreted must be shown, according to The Centre for Risk and Insurance Studies.

In a preliminary analysis of the top 20 with-profits life ins-urers&#39 returns to the FSA, Cris, which is part of the Nottingham University Business School, says the realistic balance sheets “contain a more robust calculation of options and guarantees” than the traditional approach to solvency.

Director and author of the study Chris O&#39Brien says the new reporting aims to show the assets available to with-profits funds and the liabilities of the funds in a more accurate light.

However, as it is at an int-erim stage, with the FSA still finalising its rules, O&#39Brien points out that there are inc-onsistencies in some of the calculations.

The analysis says the risk capital margin can be seen as inconsistent as it can be managed in several ways. It says the choice of investments may be switched from equities to bonds and operational and other risks that life ins-urers can be exposed to are not reflected in the risk capital margin.

Insurers have on average 2.4 times the capital needed to meet the required risk capital margin. The survey shows that at the end of 2003, the average free asset ratio was 9.3 per cent compared with 6.6 per cent in 2002.

O&#39Brien says: “There are many merits in what is going on and we welcome these dev-elopments but more thought is needed on the presentation of figures and better understanding of the high-risk capital margin is needed.”

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