Insurance sector is well-placed to weather storm

Last month, the Bank of England’s Financial Stability Review raised concerns about the implications for the insurance industry, having experienced a relatively stable few weeks, after the turmoil of the autumn, of corporate bond defaults and further large falls in the equity markets. To reflect on the questions that have been asked of the insurance industry and its ability and how the insurance sector functions, the ABI’s view as the voice of the UK’s insurance industry is clear.

According to them Insurers are different from banks, with different funding arrangements and business models. The insurance industry entered the crisis in a strong capital position and, as insurance companies do not lever their assets and liabilities are long-term, it is well placed to avoid liquidity difficulties and weather further shocks.

Sarah Wilson, the FSA’s Insurance blog Sector Leader, said that the insurance industry “is better prepared to deal with stressed market conditions”. In the meantime, several of the UK’s largest life insurers have made public the state of their capital and their exposure to potential further falls in bond and equity markets, demonstrating that their position is sound. With greater investment in corporate bonds, it is known that ABI members own less than 15 per cent of the stock market, compared with about 20 per cent five years ago.

Although, corporate bond values are falling at the moment, insurers can and do withstand falls in the market price of bonds. Most of their liabilities - such as annuity payments — are largely matched by the bonds’ income, which is not directly affected by currently volatile and unreliable market prices. As it is known even when, in the past, an insurer has come under financial pressure, it has continued to pay claims.

The FSA recently adapted some of its rules to give insurers more flexibility around their capital guidance, that insurers will not be forced to sell their bonds or equities unnecessarily, which would exacerbate current market difficulties. Therefore, markets as well as the consumers can have confidence in British insurers, with the Financial Services Compensation Scheme covering insured losses and annuities without any upper limit, for any compulsory insurance taken out, in the event of an insurers’ collapse.

The basic facts about how the insurance industry operates, protects its business and looks after its customers’ interests must not be ignored. Insurers remain well-equipped to deal with the challenging environment.