Watchdog acts to halt sell-off

Paul Armstrong12 April 2012

THE Financial Services Authority has acknowledged the pain being suffered in the life assurance sector as a result of plunging share markets by making it much easier for companies to prove they are solvent.

The controversial move is aimed at preventing life assurers from driving down the already-depressed share market by having to sell equity investments worth billions of pounds in order to meet the FSA's requirements.

The decision was welcomed by the Association of British Insurers and other parts of the City exposed to the stock market. 'It will give life insurance companies a margin of extra flexibility,' said the ABI's Peter Vipond.

Insurance shares jumped on the news, underpinning a rise of 93.4 points in the FTSE 100 index to 4634.0. CGNU, Prudential, Friends Provident, Royal & SunAlliance and Legal & General were among those to enjoy rises of 5% or more.

The FSA dropped the so-called resilience test following the crash in share prices caused by the terrorist attacks of 11 September, reintroducing it in early December. The watchdog said the revised test will remain in place until at least the end of May 2003 and may be introduced permanently after that.

Under the full test, assurers had to prove they would remain solvent if the FTSE All Share index crashed by 25%, wiping billions of pounds off their investments. Failure to pass the test would have required them to sell some equities and invest the proceeds in fixed-interest vehicles. These carry lower rates of return, and so the returns paid to those holding their with-profits policies would also fall.

Today the FSA said the test had been altered so that assurers have to calculate the difference between the current level of the FTSE All Share index and its average closing price over the past three months. The 25% threshold would then be lowered by the percentage difference between the index's current level and the three-month rolling average.

The index stands at about 10% below the average, meaning the 25% threshold would be cut to 15%. The lowest threshold allowed under the revised terms is 10%.

FSA managing director John Tiner said there was no need at present to drop the test. But he said the existing test was 'insufficiently sensitive' to the recent plunge in share prices and could 'cause perverse asset allocation'.

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