The industry regulator, the Financial Services Authority (FSA) has written to the chief executives of many insurers inviting them to apply for solvency margin waivers in view of the difficult times experienced by insurers.
Quite simply, most financial services organisations, including , are required to maintain a minimum amount of assets in excess of liabilities, the solvency margin. As share prices have fallen over the last few years, the capital value of a company goes down. This has put many insurers in danger of breaching their capital adequacy threshold and effectively putting them at risk of the FSA suspending them from trading. Hence the FSA offering concessions for insurers to obtain solvency waivers and not have to either change their business or investment strategies.
Our view
This is a dangerous game with people gambling on a medium to longer term market recovery. Whilst we believe that recovery is likely and the fact that leaving insurers to carry on with their normal business practices ultimately benefits the consumer rather than the catastrophic effect that would happen if trade were suspended for any provider, it is still gambling with people lives and money.
The FSA will be chastised whether they take appropriate action or not - they cannot win in such a difficult situation. At least they have made a decision!
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