29 June 2012

FSA: Solvency II and linked long-term insurance business

In Consultation Paper (CP) 11/23: Solvency II and linked long-term insurance business, the FSA sets out its proposals for changes to its rules and guidance on the operation of unitlinked and index-linked insurance policies, to ensure they comply with the requirements of Solvency II. These rules and guidance are found in the Conduct of Business sourcebook (COBS) 21, Permitted Links. This feedback statement sets out the responses the regulator received on the CP.

COBS 21 sets out the high-level rules firms must follow in managing their unit-linked business, as well as the types of assets they can use to back this business. The UK life sector currently manages assets of £783 billion, backing benefits under unit-linked policies. A further £29 billion of assets relates to index-linked policies.

The overriding principle the FSA has followed in reviewing these rules is to maintain its policy intention that, where the policyholder or beneficiary is a natural person and bears the direct investment or other risks in the assets used, the regulator will maintain a restricted list of assets. This is to ensure they are protected from any inappropriate risks. In practice, this will mean retaining a restricted list of assets for individual policyholders with stakeholder pensions, personal pensions, endowments, insurance bonds and members of defined contribution (DC) occupational pension schemes. The introduction of automatic enrolment in October 2012, where many more consumers will join DC occupational pension schemes, will only make this principle more important.

This paper is aimed at life insurance firms and friendly societies that write unit-linked business or have existing books of unit-linked and index-linked business. It should also be read by financial advisers and may be of interest to consumers with long-term polices and consumer groups.

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