Insurers must convince FSA they are solvent

The new, relaxed solvency rules, introduced by the FSA in January, will affect the more detailed accounts life insurers are required to file to the regulator in addition to normal share-holder financials.

In the FSA accounts, liabilities are calculated on a more conservative statutory basis. But last month, the UK regulator said insurers could calculate liabilities on a less strict footing, which observers consider more realistic. This in turn could generate vast amounts of extra work to produce the revised FSA accounts.

For some companies, this will mean recalculating their liabilities to prove their solvency, according to James Dean, managing partner regulation at Ernst & Young. ‘It is generally a very helpful thing, if a life company can’t meet minimum margins. It does not mean the company is bust. It is more like a warning point,’ he explained.

The move will affect accountants and actuaries working in insurance companies.

But it will also have a bearing on auditors of insurance companies, who have to sign off a company’s accounts as able to continue as a going concern.

‘Audit firms will be involved when the figures in the audit report are affected with more realistic balance sheets,’ added Dean.

The FSA’s relaxation comes as plunging stock markets caused billions of pounds of losses to the world’s insurance companies, who invested heavily in equities. With this new rule, insurers will not be forced to sell their equities to remain solvent.

The changes affect all insurance companies many of whom are reporting results this week, including the Prudential, Old Mutual and St James’s Place. Pre-tax profits at St James’s Place, announced on Monday, were halved to £42.4m from £107.5m due to difficult market conditions and one-off losses on non-core, or stock exchange, investments.

New business in its long-term savings operations fell 22% to £154m and assets under management fell 6% to £5.9bn – all as a result of falling stock markets.