The Financial Services Authority (FSA) has proposed rules to maintain protection of policyholders with unit linked and index-linked life insurance products while taking account of new European requirements for insurers.
Recent figures show that the UK unit-linked long-term life sector has assets of £815bn under management and a further £24bn in index-linked policies.
New EU solvency requirements for insurers in the Solvency II directive will come into effect in 2013/14. Among its requirements are new high-level principles around how insurers’ assets, including unit-linked and index-linked funds, must be managed. This replaces the current FSA approach which lists the particular assets insurers can use. However, where individuals bear the direct risk of investing in unit-linked and index-linked policies, Solvency II allows the FSA to continue to specify which assets can be used for such policies.
The proposed new rules will largely continue the existing FSA requirements, but will expand them to permit investment in some indices-based investments and bonds. The FSA will implement high-level requirements from Solvency II that strengthen the current rules saying insurers should only invest in assets that they can properly value and monitor.
Sheila Nicoll, director of policy, said “Millions of people rely on unit-linked policies to keep them secure in their retirement. While regulation cannot protect policyholders from market movements, these rules are designed to ensure that they can be confident that their money is being invested prudently.”
The FSA has also published a consultation paper setting out proposed Handbook changes to transpose the prudential aspects of the Solvency II directive into FSA rules.
Jim Bichard, insurance partner at PwC, comments
“The consultation provides useful clarity over the implementation of Solvency II in the UK and member state options. The FSA estimates Solvency II will cost the UK insurance industry £1.9bn to implement, with £200m annual costs to maintain compliance post implementation. This provides a stark reminder of the scale and challenge of the task ahead for insurers.
The FSA has limited scope for discretion on how Solvency II is implemented and much of this will be dictated by the adoption of Omnibus II and national level reporting templates, which are expected in 2012. The FSA is using this opportunity to articulate how the new UK regulatory reform model will align with the Solvency II regime.
The proposed changes to the permitted links rules will expand the range of assets that can be used by insurers writing linked business. This may give these insurers the opportunity to develop new offerings to their linked policyholders.
Small insurance firms (mainly friendly societies) that fall outside the scope of the Solvency II Directive will now be able to apply to comply with the requirements, but this will not be enforced. A review of the handbook to apply to these non-directive firms will be carried out post Solvency II implementation.
Composite insurers will be pleased that the FSA has confirmed that the concept of a long term fund will disappear under Solvency II as this will allay fears that maintaining this concept would result in ring-fencing of the long-term fund, which could place composite insurers at a competitive disadvantage.
The biggest challenge for most insurers will be digesting the huge amount of Solvency II-related consultations and understanding how the proposals affect their implementation plans and on which areas they should aim to respond to the consultation to try to influence the final requirements.”
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