Financial Stability - Contingency Planning Team

Financial Stability - Contingency Planning Team

HM Treasury

1 Horse Guards Road

London

SW1A 2HQ

21 September 2012

AFM Response to consultation on financial sector resolution

1. I am writing in response to this consultation paper, on behalf of the Association of Financial Mutuals. The objectives we seek from our response are to:

• Provide support for the proposals in the consultation.

1. The Association of Financial Mutuals (AFM) was established on 1 January 2010, as a result of a merger between the Association of Mutual Insurers and the Association of Friendly Societies. Financial Mutuals are member-owned organisations, and the nature of their ownership, and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers.
2. AFM currently has 55 members and represents mutual insurers and friendly societies in the UK. Between them, these organisations manage the savings, protection and healthcare needs of 20 million people, and have total funds under management of over £90 billion.
3. We welcome the consultation paper, and limit comments to sections dealing with insurers. We see the need to protect policyholders as paramount, particularly as mutual organisations that are owned by their customers. We do not have other external stakeholders and as a result our members’ interests come first.
4. Detailed responses to individual questions raised in the consultation are attached.
5. We would be pleased to discuss further any of the issues raised by our response.

Yours sincerely,

Chief Executive

Association of Financial Mutuals

Responses to specific questions in Chapter 5

Do you consider that some insurance institutions have a degree of systemic potential?

To a limited extend we do.

However, we also consider that many policyholders may have considerable amounts of their own finances entrusted to some insurers. Their stakeholder pension and their ISA may both be with one insurer and dependent upon that insurer’s continued survival. It is also important that policyholders have faith with the resolution process. They have an obligation to choose solvent insurers but their commitment may be for many years. How can they predict all possible outcomes for 10, 20, 30 or even 50 years into the future?

Therefore, a resolution process that puts policyholder protection at its core is essential in our view for all insurers.

Do you agree with the Government’s overarching objectives that any insurer should be able to exit the market without disorderly impact, and that the interests of policyholders should be appropriately protected? If so, what is the most appropriate means of achieving these objectives?

We agree.

The simplest method is by some form of transfer of engagements (Part VII transfer). The capital requirements of an insurer tend to provide a buffer which would allow the regulator (the PRA under the new regime) time to quiz management, decide on action and then carry it through. The natural resolution would be to find another provider with the same ethos and client mix to take on the liabilities. Some element of economies of scale can sometimes provide enough incentive for the receiving insurer.

In really extreme cases, it may not be possible to find any insurer willing to take on the book of business. This would be true if the resources available are now below the basic technical reserves under Solvency 2. There should be a mechanism to protect policyholders in this circumstance and this could be a mix of:

• FSCS injections into the fund to increase assets to the level of the technical provisions;
• Reductions in benefits to reduce the technical provisions to the level of the assets.

After these actions are carried out, the regulator should be able to carry out a Part VII transfer to another provider.

We would suggest that the regulator should be given the power to carry out the transfer (similar to friendly societies) for all insurers. We would also suggest that the regulator should be appointed as the administrator- rather than a different body- until all policyholders are discharged, and that the regulator should be given powers to negotiate settlements with other creditors.

Do you consider that the insolvency framework for dealing with the failure of insurers needs to be enhanced? What form should improvements take to provide greater clarity and certainty around securing continuity of cover for policyholders?

Yes. We believe that the regulator should be given similar powers of intervention for all insurers as for friendly societies and should be appointed as the administrator until policyholder liabilities are discharged.

Do you consider that the UK authorities should have resolution tools in the event that the failure of an insurance company raises public interest concerns because it is likely to have systemic implications?

Yes but for all insurers.

Do you consider that a portfolio transfer power should be introduced for use as a preventative supervisory tool?

Yes.