Protection for Unit-linked Policyholders Pushed
The Financial Services Authority (FSA) has proposed rules to maintain protection of policyholders with unit linked and index-linked life insurance products while taking account of new European requirements for insurers.
The figures for the size of the market are derived from SynThesis Life 2010.
Unit-linked policies are used within individual pensions, endowments, investment bonds and whole of life insurance policies. They are also used as investments for both defined contribution (DC) and defined benefit (DB) occupational pensions. Recent figures show that the UK unit-linked long-term life sector has assets of £815 billion under management and a further £24 billion in index-linked policies.
The benefits unit-linked policies pay are directly linked to the value of the assets underlying them. In the same way, index-linked policies pay benefits that are based on the index, such as the FTSE 100 or the retail prices index (RPI) to which they are linked. So the policyholder or beneficiary of the unit or index-linked plan sees the expected value of his or her pay-out fluctuate depending on the value of the underlying assets or indices.
New EU solvency requirements for insurers in the Solvency II directive will come into effect in 2013/14. Among its requirements are new high-level principles around how insurers’ assets, including unit-linked and index-linked funds, must be managed. This replaces the current FSA approach which lists the particular assets insurers can use.
However, where individuals bear the direct risk of investing in unit-linked and index-linked policies, Solvency II allows the FSA to continue to specify which assets can be used for such policies.
The current ‘permitted links’ rules allow insurers to invest in a range of financial assets such as share, bonds, cash, deposits, collective investment schemes and property. Derivatives based on those assets can be used for certain purposes.
Defined benefit (DB) pension schemes will not be restricted to the proposed list of assets in the CP. Unlike DC schemes, in DB schemes the members, who are the ultimate beneficiaries, do not bear the direct investment risk.
Although policies taken out to support DB scheme benefits will not be limited to a set list of assets, they will still have to comply fully with the new strengthened high level principles on how assets must be managed.
Solvency II allows such a list to be maintained but it cannot be more restrictive than the list of assets allowed for UCITS funds. In order to comply with this requirement the FSA also proposes to permit the use of some indices based on non-financial assets as well as adding a new definition of ‘money market instruments’.
The proposed new rules will largely continue the existing FSA requirements, but will expand them to permit investment in some indices-based investments and bonds.
The FSA will implement high-level requirements from Solvency II that strengthen the current rules saying insurers should only invest in assets that they can properly value and monitor.
Sheila Nicoll, director of policy, said: “Millions of people rely on unit-linked policies to keep them secure in their retirement. While regulation cannot protect policyholders from market movements, these rules are designed to ensure that they can be confident that their money is being invested prudently.”
The FSA has also published a consultation paper setting out proposed Handbook changes to transpose the prudential aspects of the Solvency II directive into FSA rules.