FSA says banks crackdown to spare insurers

LONDON (Reuters) - The insurance industry should be spared the regulatory crackdown unleashed on the banking sector in the wake of the credit crunch, Britain's top insurance regulator said.

International efforts to tighten banking regulation reflect the sector's central role in the credit crisis, and any parallel increase in the regulatory scrutiny of insurers must be weighed up carefully, Ken Hogg, director of the Financial Services Authority's insurance sector, told Reuters in an interview.

"With each particular action that's emerging for banks, the key thing is that if there's a read-across to insurers, that it is appropriately thought through," Hogg said.

"We're keen to avoid any automatic read-across from one sector to the other."

European regulators hope to prevent a repeat of the credit crunch and subsequent financial crisis by forcing banks to hold more capital, and by curbing bankers' pay.

While no regulator has formally proposed imposing such measures on the insurance industry, insurers are concerned that some of the new constraints on banks could be extended to them.

Those fears intensified last month when European Central Bank President Jean-Claude Trichet said in a speech that the view that insurers are too small and self-contained to destabilise the financial system "needs to be challenged."

CAPITAL RULES OK

The FSA's Hogg said there was no particular need to force British insurers to hold more capital, as the sector's existing Individual Capital Adequacy Standard (ICAS) regime had helped it emerge in good shape from last year's financial crisis.

"There's no pressing need to look afresh at the ICAS regime," he said.

The FTSE index of British life insurance stocks fell to an all-time low in March on concerns that falling stock markets and potential defaults on corporate bonds could dent insurers' capital reserves, forcing them to plug the gap through rights issues.

But the sector's capital reserves held up without the need for any major capital-raising, and the index has since more than doubled, helped by rebounding financial markets.

Hogg acknowledged that there was a need to inform investors to mitigate the perception that insurers' capital strength is quickly eroded during financial market sell-offs.

"We need to continue our dialogue with firms to maintain the appropriate level of confidence," he said.

Britain's ICAS capital regime, introduced five years ago after a stock market slump in the wake of the dotcom bubble exposed weaknesses in insurers' capital structure, is to be replaced by the European Union's Solvency II rules in 2012.

The new EU rules, like ICAS, require insurers to hold capital in proportion to the risks and financial obligations they take on.

ILLIQUID ASSETS

Hogg said he was hopeful that the final draft of Solvency II would incorporate an "illiquidity premium," correcting an omission which the Association of British Insurers reckons could open a 50 billion pound capital shortfall for its members, and push up costs for consumers.

"The case for an illiquidity adjustment for both existing and new business is clear. It is inconceivable that the (European) Commission would want to see future EU pensioners disadvantaged as a result of Solvency II," he said.

The illiquidity premium would allow European annuity providers, concentrated mainly in the UK, to discount their liabilities to reflect the fact that annuity customers can't cash out their policies.

That would allow them to avoid raising their capital reserves against potential declines in the value of the corporate bonds they typically use to fund annuity payments.

A specialist committee made up of regulators and industry figures from across the EU is due to issue recommendations by the end of January on how the illiquidity premium could be incorporated into Solvency II.

(Editing by Sharon Lindores)