FSA concerned over life insurers stability
Concerns over the stability and safety of life insurers financial reserves cause fall in their share prices and FSA offer of help.
The situation started to build up steam at the end of last week when it was revealed the FSA was considering relaxing its solvency rules due to falling share and bond markets. It was reportedly ready to be flexible if life insurers were having problems meeting their capital demands. The insurers are facing a double whammy of steep declines in the stock market and increased risk slashing the value of corporate bonds.
The life insurers are big holders of corporate bonds, an estimated £68 billion of which are held in with profits funds. A large percentage of these bonds are issued by banks and financial firms who are now seen as more risky and even liable to default. This has effectively cut the value of insurers bond holdings while their liabilities have remained the same.
Recent major falls in the stock market also had an impact on life insurers who are required to have sufficient reserves to meet liabilities if the market falls by 25 percent. The falls have been greater than this forcing some companies to issue statements affirming their solvency. This has included statements from Aviva on the solvency of Norwich Union while Friends Provident reassured everyone that even falls of 30 percent in equity prices from current levels would have no material impact on it’s surplus. Prudential were forced to deny rumors they were planning a rights issue due to a weak capital position. Recently Chesnara decided to purchase its own share as a result of the low level of the Company’s share price. It followed this a week later with another buy back as its share price continued to fall. Legal and General have also been pursuing a share buy-back and confirmed that a 30 percent fall in equity markets from the end of September would reduce their estimated Insurance Groups Directive (IDG) surplus to approximately £2 billion from £2.9 billion.
Endowment policy holders are protected to some extent by FSCS guarantees on both the investment and life insurance components of the product. Unfortunately endowment policy values and other with profits products have been hit hard and many will be facing an even bigger short fall than previously expected. Aviva customers may be facing additional dissapointment now that an expected policy payout may not go ahead.
