Insurers win confidence vote from regulator

Life insurance companies, which have had solvency margins stretched to the limit as stock markets have tumbled to record lows, were dealt a comforting hand by the Financial Services Authority yesterday, when it said the sector had enough resilience and reserve to withstand further falls in the market.

Shares in insurers, which have taken a hammering in past few months, closed up on news that the FSA has been asking the UK's 20 largest insurers since July to provide the regulator with information on their liabilities and the assets they have to back them.

John Tiner, the managing director of the FSA, said: "It is fair to say that the survey revealed life insurers have significant ability to withstand further large falls in equity values from the level at which the exercise was commissioned, when the FTSE 100 was around 4,000."

Mr Tiner said although this was "clearly a challenging time" for the insurance industry, the FSA's survey confirmed insurers do have enough excess assets to meet their liabilities. Prudential shares closed more than 5 per cent higher at 358p while Aviva, previously known as CGNU, added more than 4 per cent to 373p.

Gordon Aitken, an analyst at Credit Suisse First Boston, welcomed the encouragement and does not believe shareholders will be called upon to inject significant amounts of capital into UK life funds.

Mr Tiner has been leading an FSA project to overhaul the way insurance companies are regulated after Equitable Life was brought to the brink of collapse because it failed to hold sufficient reserves to match its liabilities. This threw the arcane and opaque practices involved in insurance company solvency calculations and reporting methods into the spotlight. The FSA was sharply criticised by an independent inquiry for failing to spot the precipitous position of Equitable Life and for failing to act quickly enough once concerns were raised.

Mr Tiner yesterday revealed the details of the FSA's plans to tighten the way solvency levels are calculated and to make reporting practices more transparent, which should make it easier to spot when a company is experiencing difficulties. He has demanded insurance companies be more open with the FSA and their customers about their solvency margin, increase the responsibility and accountability of senior management, and be more aware of the impact of their actions on consumers. "The majority of life insurance reporting is woefully lacking," Ned Cazalet, an independent insurance analyst, said. "Many do not have proper reporting and management procedures and find it difficult to produce information about their financial position. You can not have an £800bn industry being run like this. The new regime will be much tougher."

This will include clamping down on the practices of "financial engineering", such as including profits from future business and reinsurance deals, to boost solvency ratios. Including future profits will be banned from solvency calculations by 2009. Aviva accounts for £2bn of future profits in its solvency calculation. "A few years ago capital was not a problem for insurers," Mr Aitken said. "They did not have to use implicit items and could hold assets that were technically inadmissible in solvency calculations without a problem. Now everything possible is being done to assure investors companies are strong."

As their exposure to falling equity markets has eaten into reserves, insurers have had to take action to ensure they have enough capital to meet liabilities. This has included cutting bonuses, as Standard Life was forced to do this week, as well as closing to new business and reducing exposure to equities.