Outlook: Relief for insurers as Tiner fiddles with the solvency rules

Fiat on the block; The truth hurts Ê

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Life assurance solvency regulation is not the sort of occupation school children would aspire to – in the same way they might want to become a pilot, footballer, doctor, nurse or even financial journalist – but suddenly it's the hot story of the moment and John Tiner, solvency regulator in chief, finds he's the stuff of headlines. With markets plunging and the Equitable Life débâcle still fresh in the memory, everyone either is or ought to be worrying about the solvency of our leading life assurance companies. Are our endowment policies and pension plans safe, or are we about to get another nasty series of shocks?

In such circumstances it seems almost perverse that Mr Tiner, managing director of the Financial Services Authority, should want to ease the solvency requirements. Surely this is a time for doing the reverse and tightening them up? Well, yes and no. Yes because we don't want any more Equitable Lifes, but no if the regulations as they stand have begun to work against the interests of long-term savers and policyholders.

Britain has some of the toughest solvency requirements anywhere in the world, most of them established in the aftermath of the calamitous bear market of the mid-1970s. If you think the industry is in a financial shaky condition today, just go back to those turbulent years when even the largest life funds were pretty much insolvent. Regulators turned a blind eye, not just because the rules to measure solvency didn't properly exist, but also because they knew that life assurance was a long game, that markets would eventually recover and that a company which at that point in time might have been unable to meet its liabilities would in the long run be perfectly all right.

In lesser form, the same approach is being adopted today with the relaxation of the resilience test. The rules require life companies to keep minimum reserves of 4.5 per cent in excess of liabilities. The resilience test forces them to stress test these reserves against the possibility of a 25 per cent drop in the stock market. If such a fall would tip them over the edge, then they may feel obliged to sell equities to protect their solvency, leading to a self-feeding downward spiral in the market. This is what happened in the immediate aftermath of 11 September, when the resilience tests were temporarily suspended, and in less severe form it is happening again now.

This time around Mr Tiner is proposing only to amend the test, so that the 25 per cent fall is measured against the three-month moving average for the FTSE All Share index, rather than the previous day's close. In a falling market, the effect is significantly to reduce the level at which enforced selling has to start kicking in. Right now, for instance, life assurers would have to stress test against a fall of only about 15 per cent in the market.

This is obviously a quite neat concession which stops short of abandoning the resilience test altogether but should in most cases stem the process of enforced equity sales, much of which cannot be in the policyholder's best interests. However, Mr Tiner may only have delayed the problem. If the stock market sticks at this level for some months or carries on down, then the forced selling will begin anew. Much of the present solvency regime is completely out of date. Most big life assurers are financially robust, even in today's markets. They shouldn't be forced to sell their choicest assets. The sooner the FSA embarks on promised root-and-branch reform of the solvency tests, the better.

Fiat on the block

Fiat has not enjoyed the dolce vita for as long as most people can remember. The car division, its biggest headache, has lost money for seven of the last eight years and is heading for an operating loss this year of around £650m. The group's debt, meanwhile, has been downgraded to a notch above junk and the pressure grows for a fire sale of assets to bring borrowings back under control. Even the local football team, Juventus, is not the force it once was. Ferrari and Alpha Romeo are motoring legends, and would fetch good prices even in today's depressed markets, but could Fiat bear to part with names as much synonymous with Italy as Armani, Parma ham and the leaning Tower of Pisa?

This week the revolving door spun again in Turin and in came Gabriele Galateri di Genola, to take over as chief executive from the ousted Paolo Cantarella. Mr Galateri, a Piedmontese aristocrat, does not know a great deal about making cars but he knows a lot about making money, having acted as the in-house banker for the past 16 years to the Agnelli family, which has a controlling 34 per cent stake in Fiat.

Mr Galatari's job used to be to invest the Agnelli dividends in other, less cyclical, businesses such as holiday companies and vineyards to counter the volatility of earnings from the car and truck business. Now his mission is to find a solution to Fiat Auto. The car business faces a long and difficult road back to health for a host of reasons. Fiat's domination of its home market was once a strength. Now it is a weakness, with Italian sales down 14 per cent this year. Its experience overseas has scarcely been any happier. Fiat was investing in Argentina, Brazil, Turkey and Poland just as the smart money was pouring in the opposite direction. Nor has it been helped by a series of uninspired product launches.

The obvious solution is for Fiat to sell the remainder of the car business to General Motors. GM already owns 20 per cent and Fiat has the option to make it buy the remaining 80 per cent from 2004 onwards. But GM's Rick Wagoner knows a buyer's market when he sees one and professes to be in no hurry to take the business off Fiat's hands. That's one problem, but the bigger stumbling block is the Fiat honourary chairman, Giovanni Agnelli, for whom selling the business would be tantamount to industrial surrender and the end of life itself. That is why the ageing and ailing patriarch of the family refuses to raise the white flag and why Fiat's sickly share price revs up with every new health scare that emerges from Turin.

The truth hurts

Shock, horror, a government adviser tells the truth. Gordon Brown, the Chancellor, is reported to be furious that Vicky Pryce, the woman hired by the Department of Trade and Industry as its chief economic adviser, has been sounding off about the state of the public finances, the five economic tests and the chances of the Government calling a euro referendum. Actually all she was doing was stating what everyone bar the Government thinks of as the blindingly obvious – that transport could become a black hole for government spending, that the slowdown in the world economy might blow the Government's budget arithmetic off course, that people expect taxes might have to go up again, that applying the five tests will be no more than informed guesswork, and that the Government is unlikely to call a euro referendum it thinks it will lose. The truth hurts but three cheers for Ms Pryce for saying it, even if she might have been more guarded had she realised it would be reported in the press. More advisers like her are what the doctor ordered. Unfortunately she may now never make it to the starting post. And yes, the Government can be that spiteful.

jeremy.warner@independent.co.uk