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Waiver-thin reassurance for investors

The FSA has admitted that with-profits offices are finding its current solvency requirements “problematical” and has sent out letters encouraging the take-up of solvency waivers.

As a measure of the seriousness of the situation, the FSA is suspending its usual consultation process to move quickly to a new regime and allow life companies to apply for four different kinds of solvency waiver.

Waivers are available for how the companies calculate mathematical reserves, to allow shareholder funds to be held outside the fund as reserves, or for persistency or future payment assumptions to be relaxed. Life companies are still grappling with these and deciding which, if any, to apply for.

The FSA says it is unusual for it not to consult but it is not the first time. Its letter says the guidance “is given without consultation because we consider that the delay involved in consulting would be prejudicial to the interests of consumers”.

The letter follows one sent to chief executives in January by FSA managing director John Tiner, which also concerned solvency waivers. Tiner has since given two speeches on the subject and the FSA is believed to be concerned about life companies being reticent to come forward with problems because of possible adverse publicity.

The latest letter makes it clear that firms will still have to show they have the reserves to meet their liabilities and meet the minimums set by EU law.

It states: “Firms will need to demonstrate to us that they are holding sufficient financial resources to meet expected liabilities, even under adverse circumstances.”

It has asked for a verification of existing figures from the life industry, which industry analyst Ned Cazalet thinks may present problems. He says: “There is a complete lack of proper data. Many companies have been run on calculations made on the back of fag packets.”

The solvency waivers are intended to stop technical selling – where life companies sell equities to meet statutory reserving requirements – rather than shore up weak companies at any cost.

The spectre of Equitable Life continues to haunt the FSA. Its admitted mishandling of Equitable Life saw the FSA blot its copybook just as it got its full powers and the letter shows a willingness to do things differently.

But guaranteed annuity options – which crippled the country&#39s oldest life insurer – are one of the areas where the FSA is considering softening its stance. Where companies feel that reserving on the basis that 95 per cent take-up of guaranteed annuity options is over-prudent, the regulator is now prepared to give individual guidance.

Life companies are now digesting the letter and deciding which of the waivers to apply for. They are keen to dispel any suggestion that applying is an admission of financial difficulty.

Standard Life group finance director John Hylands says: “As a financially strong company, we expect to benefit from this move to a more realistic basis of balance sheet reporting. We are in discussion with the FSA and look forward to hearing their decision in the near future.”

Norwich Union spokesman Ian Beggs says: “We expect that solvency waivers are likely to be granted by the FSA only to the stronger life insurers. We believe the intentions of the FSA are that if certain insurers are given more investment freedom to go out and invest in equities, this could help stimulate the market generally. The problem at the moment is that there are few buyers of equities about, due to the general lack of confidence among investors.”

But many IFAs are clearly unsettled by the difficulties in the life sector and stung by previous scandals in financial services and subsequent difficulties in getting professional indemnity insurance.

Wentworth Rose chief executive Philip Rose says: “It just shows how serious a position the industry is in. Every investor has to take a gamble. Clearly, the FSA is gambling that the stockmarkets will recover. Now it must know what it feels like to be a pension fund manager.”

However, Rose believes the waivers are sensible because they do not allow a life insurer&#39s financial position to be crystallised at unprecedented stockmarket lows.

Informed Choice managing director and Sofa chairman Nick Bamford asks what will happen in 10 years time if a life company which has been given waivers goes bust and its reserves turn out to be less than thought. “Who then gets the blame? Will it be the regulator or the adviser who sold the products?” he asks.

Given the general wariness that people now have about life companies, Bamford believes the FSA should be explicit about the actions it takes in respect of each company. He says: “It is incumbent on the FSA to publicise the waivers so that both consumers and IFAs are aware of what is going on.”

Rose also feels that ongoing openness and publicity from the regulator is important. While the granting of solvency waivers will not help consumer or IFA confidence, he says the lack of a waiver could be much worse. He is concerned about the Equitable Life situation, where the regulator knew of problems but did not air those publicly, instead allowing people to continue to take out policies with the ailing company.

FSA practice is to publish waivers on its website but not to comment on negotiations or submissions that fail. Rose says: “If a company did not get a waiver, we probably would not do business with it.”

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