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The Actuary The magazine of the Institute & Faculty of Actuaries

Life solvency on the mend

The Centre for Risk and Insurance Studies (CRIS) at Nottingham University has now completed its preliminary analysis of the top 20 with-profits life insurers’ returns to the Financial Services Authority (FSA).

Several life insurers have now published a ‘realistic balance sheet’ as part of their returns to the FSA: this shows that, on average they have 2.4 times the capital that would be needed to meet the effect of specified adverse financial conditions (the ‘risk capital margin’). The traditional measure of solvency shows that life insurers’ finances are healthier than a year ago, with the free asset ratio up by 2.7% points to 9.3% on average (though it was 22.5% in 1999).

Chris O’Brien, director of CRIS, commented: ‘The new figures from the realistic balance sheet are more helpful than the traditional but artificial approach to solvency: the liabilities rightly reflect asset shares, and contain a more robust calculation of options and guarantees. However, the realistic balance sheet is not realistic in showing financial strength: it fails to include other capital that life insurers have available if needed; and the risk capital margin requirement does not cover all relevant risks.

‘Part of the improvement in the traditional free asset ratio arises because nine of the 20 companies have used waivers from the traditional rules in calculating their liabilities: these remove some of the artificialities in the calculations (which has been a well-known problem) but it also means comparisons are difficult.

‘Insurers are making less use of financial engineering: in 2002 they used £8.8bn of future profits and £2.4bn of other forms of financial engineering (such as financial reassurance): these figures are down to £4.2bn and £2.2bn respectively.

‘We are in an interim stage as FSA develops its new reporting rules. This means companies are using different methods and assumptions. Until the new rules are introduced fully we cannot make a true assessment of the financial prospects of the sector; the current mixture of methods leaves us in a muddle.’

The survey of life insurers’ FSA returns is at www.nottingham.ac.uk/business/cris.