The FSA has introduced a welcome note of flexibility whilst preserving strong regulation Mary Francis, Association of British Insurers

The Financial Services Authority (FSA) said it would consider granting waivers to life insurance firms so that they are not forced to sell shares when reaching so-called solvency margins.

These solvency rules are supposed to ensure that companies have always enough cash to pay out on their policies.

However, the FSA says if they will only consider requests from life insurers that are financially sound.

Fears have grown about the financial strength of the insurance industry as the benchmark FTSE 100 has suffered one of its worst-ever months.

Shrinking funds

Insurers have been pressing the FSA for months to change rules they say are counter-productive.

One rule in particular aims to protect investors by ensuring life insurers have comfortably enough to pay what they have guaranteed to customers.

They must have 4% more in their coffers than whatever they have guaranteed to pay out.

If not, they may be forced to start selling shares.

Because of the slumping stock market life insurers funds have shrunk to the point where they're nearly breaking that rule.

'Not realistic'

Now the FSA will let them bypass those rules if in its judgement, customers money will be safe.

There is a risk that these sales cause further falls which in turn trigger additional selling and a downward spiral in equity market prices John Tiner, FSA

The policy shift was outlined by the FSA's managing director, John Tiner, in a letter to the chief executives of the UK's main life insurers.

Mr Tiner said the current "solvency" rules were not realistic.

Companies could have plenty of cash in reserve but be forced to sell off shares just because they had reached the "regulatory trigger point".

Consumers

"There is a risk that these sales cause further falls which in turn trigger additional selling and a downward spiral in equity market prices," Mr Tiner said in his letter to insurers.

He said the FSA wanted to introduce a more "realistic" approach from the beginning of 2004, taking into account wider factors.

In the meantime, any life insurance firms close to breaching the solvency rules could apply for a waiver.

Mr Tiner said the FSA would have to be satisfied there was "no undue risks to consumers", before bending the rules.

Firms in a weaker financial position should instead consider "new capital being injected by shareholders, closing to new business, sale or transfer of the business, asset re-allocation," he added.

Long-term interests

The FSA's move was welcomed by Mary Francis, director general of the Association of British insurers.

"The FSA has introduced a welcome note of flexibility whilst preserving strong regulation.

"John Tiner's letter recognises that insurers have substantial reserves, over and above the funds they need to meet all liabilities to their policyholders.

"This should ensure that insurers will not have to sell equities when that is not in the best long-term interest of their policyholders," she said.