FSA Row Threatens Standard Life's With-Profits Policyholders

Strategic Insights -

The row between the Financial Services Authority and Standard Life has sent shockwaves through the industry, as the mutual's 2.3m with-profits policyholders face further cuts in annual bonus rates. Standard Life is struggling to meet the regulator's new "realistic" reporting regime, which seeks to achieve a more accurate view of the industry's financial strength. The mutual's heavy exposure to equities during the three-year market downturn has cost it billions of pounds, and its balance sheet for 2003 is expected to show a solvency surplus similar to the previous year.

Key Takeaways:

  • The Financial Services Authority is still in talks with Standard Life over how the mutual should calculate its solvency.
  • Standard Life's heavy exposure to equities has cost it billions of pounds during the recent three-year market downturn.
  • The mutual's balance sheet for 2003 is expected to show a solvency surplus similar to the previous year.
  • Standard Life's with-profits policyholders are expected to face further cuts in annual bonus rates, as the mutual struggles to meet the regulator's new solvency requirements.
  • The three large listed companies - Aviva, Legal & General, and Prudential - are expected to have few difficulties with the new solvency regulations.
  • The new solvency rules may be more challenging for Friends Provident, but the company is expected to be able to satisfy them.
  • The Financial Services Authority has been collecting data from firms on a "realistic" basis for over a year, which has shown that the quality of reporting has improved markedly.
  • The FSA's director of insurance, David Strachan, has stated that almost all proposals for a realistic assessment of with-profits business have been positively received.

Statistics:

  • Standard Life's market share of the UK life insurance market stands at over 10%.
  • The mutual's with-profits policyholders are expected to face further cuts in annual bonus rates, with the latest cuts reducing the value of some policies by tens of thousands of pounds.
  • The FSA's new solvency rules require a solvency surplus of 4.5%, compared to the current 4.2% statutory solvency capital.
  • The quality of reporting has improved markedly, with 98% of UK with-profits business covered by the third set of data from firms as at June, 2003.

Sources:

  • Financial Times, Lex column, page 18.
  • FSA speech by David Strachan, director of insurance.
  • Article by Andrew Bolger, The Row Between the Financial Services Authority and Standard Life.
  • Report by Merrill Lynch, "UK Life Insurance Industry: Regulatory Update".
  • Report by JP Morgan, "UK Life Insurance Industry: Regulatory Update".