Following a recent increase in
regulatory scrutiny by the UK’s Financial Services Authority (FSA),
mutual insurers and friendly societies face “consolidative
pressures”, believes David Masters, an analyst at rating agency
Moody’s Investors Service.
Masters said increased scrutiny was marked by
a letter sent by the FSA in October 2009 to mutual insurers’ CEOs
regarding prospects of their institutions, particularly those that
continue to write new with-profits business in a declining sales
environment. CEOs at over 50 mutual insurers with combined assets
of about £80 billion ($130 billion) were contacted and had until 31
December 2009 to respond.
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Specifically, said Masters, CEOs were asked to
consider strategies a mutual insurer should adopt in the event of
declining with-profits policy sales and to consider whether, in
such circumstances, they should cease writing new business to
protect the rights of existing policyholders as liabilities run
off.
The FSA also probed alternative solutions to
closing to new business, including development of new products with
certain features of traditional insurance products, or writing new
business into a newly created sub-fund or a sister mutual.
“Following the regulator’s assessment of the
mutual firms’ responses, we consider it likely that a select few
may need to take some form of corrective action, possibly including
the closure to new business for some of the smaller, weaker
mutuals,” said Masters.
“Although such firms are unlikely to be rated
by Moody’s, such activity could create marginal positive
implications for the market as a whole owing to the removal of
competition and the improved scale of the remaining insurers,” he
added.
Masters continued that Moody’s, looking at the
larger end of the UK life market, could see further consolidative
pressures as evidenced by Friends Provident’s recent acquisition by
Resolution, a specialist life insurance and asset management
consolidator.
“With the additional regulatory scrutiny on
mutual firms, changes to market positions at both ends of the
spectrum can therefore be expected over both the near and medium
term,” he concluded.
