British insurers underestimating capital: regulator

Britain’s insurance regulator, the Financial Services Authority, says British insurance companies are underestimating how much capital “they need to maintain so that there is no significant risk that they are unable to pay liabilities as they fall due.”
Furthermore, he added, some firms are relying too much on management actions to mitigate risk of reduced capital.
In a recent speech at the European Insurance Roadshow 2005, FSA insurance sector leader David Strachan outlined the regulator’s relatively new ICAS regime. It requires firms to assess what level and quality of capital they need to maintain, and to write up these assessments in what are called ‘Individual Capital Assessments’ (ICAs).
The FSA reviews the firms’ ICAs and then issues its own assessment of the firm’s required capital, called an Individual Capital Guidance (ICG), which takes into account other information available to the regulator.
“Nearly one year on since its introduction, we have now given ICG to seven life and 20 general insurance groups or firms and are well advanced with many more,” Strachan says. “Clearly it is still early days, but I can say that so far, most ICGs are higher than the firm’s ICA and we are working with firms during the process to minimize the differences.
“Where we include [recommendations for] capital add-ons we aim to be transparent about the reasons for these and strive to be as clear as we can about what firms need to do to reduce the ICG.”
Strachan said he was “encouraged to see evidence of improving risk management systems.” Still, he said, many firms were placing too much reliance on management to mitigate possible risk charges within their ICA.
“For example,” Strachan says, “some firms have made no allowance for the underwriting cycle on the basis that management will take appropriate actions to fully mitigate this risk; such as to reduce premium volumes. Whilst we do not dismiss taking into account such management actions, we would expect them to be discussed within the context of the firm’s control environment and the wider competitive market.”