The FSA has published the Financial Risk Outlook 2010 (FRO). In the FRO the FSA outlines the main risks and issues present in its operating environment, affecting firms, markets and consumers.

The FRO is divided into sections which consider: the macro-economic background and outlook; financial stability and prudential risks; market risks; and retail conduct of business issues.

In addition, sector digests have been published, including one considering the main risks for the insurance sector.

The FRO makes the following observations in relation to the following:

Life insurance

  • It is unlikely that firms will return to the levels of income and profitability which were experienced before the financial crisis. Firms should ensure that they have sufficient understanding of the risks inherent in any new activities undertaken.
  • Products should be designed, targeted and marketed appropriately to ensure that consumers are not being mis-sold products.
  • Firms should pay careful attention to capital management and planning, with an awareness that there may be a further downturn in the economy. Prudence needs to be exercised in valuing assets and liabilities and firms should ensure that assets and liabilities are appropriately matched by duration.
  • The life sector will face considerable challenges to its sustainability due to a combination of substantial regulatory and legislative developments, coupled with material changes and continuing uncertainty in the macro-economic outlook. This will require firms to take a regular look at their strategy to ensure that it remains suitable.
  • Life firms undertaking mergers and acquisitions must ensure that they manage any new debt financing obligations appropriately. Customers must be treated fairly throughout any transition period as well as after any such change. Firms must have adequate records of legacy business to ensure that liabilities can be properly calculated and that customers are treated fairly.

General insurance

  • Products need to be designed, targeted and marketed appropriately to reduce mis-selling.
  • Firms must make sure that consumers understand the full terms and conditions of products (ie motor, home and travel insurance). Customers need to be able to understand policy features including any exclusions or excess as well as any coverage for special items. This will be of particular importance for those products purchased through aggregator sites.
  • Firms should be aware that the economic environment has fundamentally altered the characteristics of some risks. Firms should take full account of this and establish appropriate reserving, pricing and underwriting strategies.
  • During the recession there has been a significant increase in the amount of claims made. This change is not just in the number of claims but in their type and size. Firms must take claims inflation into account in reserving and have suitable monitoring systems in place.

Wholesale insurance intermediaries

  • Firms should make a realistic assessment of the amount of capital that they need to hold in order to run their business effectively and to ensure they meet FSA financial requirements.
  • Firms should comply with all requirements in relation to holding client money and assets. Appropriate systems and controls need to be in place to ensure that client assets are protected and FSA rules complied with.

Solvency II

  • Firms must be vigilant in keeping up to date with Solvency II developments. Preparations should include developing internal models (where relevant) and participating in QIS5.
  • Firms which will fall within the Solvency II regime need to be planning now for all of its implications. Planning must extend beyond Pillar 1 calculations and incorporate changes to governance, enterprise risk management, reporting and public disclosure (all fundamental elements of the second and third pillars of Solvency II).

For further information on the FRO insurance sector digest: FRO Insurance sector digest

In addition, view the Financial Risk Outlook 2010