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In 2013, two new agencies will replace the Financial Services Authority (FSA) and share responsibility for supervising insurers. The Prudential Regulatory Authority (PRA) will promote the safety and soundness of firms and ensure appropriate protection is afforded current and future policyholders, while the Financial Conduct Authority (FCA) will focus on customer protection. However, the FSA has yet to offer clear guidance on how with-profits will be regulated under the dual regime.
Mutual insurers are concerned this confusion will delay agreement on the status of ‘mutual capital': the with-profits fund surpluses (also known as the inherited estate) built up over generations of policyholders and used to cover regulatory solvency requirements, finance the day-to-day running of the firm, and write new business.
While the PRA's objective is to monitor firms' solvency, and should therefore support mutuals' claim to inherited estates as working capital, it is not yet clear how decisions on distributing surpluses will be reached between the two. Actuaries say the FSA's proposals for the regulation of with-profits funds suggests the existing regulator does not appreciate the special nature of inherited estates to mutuals.
Consultation paper CP12/13, published by the regulator in July, defines an inherited estate as "an amount representing the value of the with-profits assets less the value of the technical provisions and other liabilities of the with-profits fund". However, the definition of with-profits assets excludes assets backing non-profit sharing business, like protection business, annuities, and unit-linked policies, even though the regulator recognises the liabilities relating to these products in its description of inherited estates.
For those mutuals operating both non-profit and with-profit operations out of the same common fund, current definitions mean their inherited estate will suffer a significant haircut, according to David Lechmere, head of insurance consulting at OAC Actuaries and Consultants in London. Solvency II will add an additional complicating factor for mutuals if the PRA and FCA fail to resolve the question of inherited estates.
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