Contact: Ali Agmen-Smith
Deloitte
Public Relations
+ 44 (0) 207 303 0514

The initial gloomy predictions of the impact of Realistic Balance Sheet reporting have proved largely unfounded according to a new report on the financial strength of life insurance firms. These reporting rules, introduced at the end of 2004, require firms to assess liabilities on with-profit policies on a “realistic” basis, including non-guaranteed benefits.

Analysis of end-of-year FSA Returns shows that the funds remain solvent on the new reporting basis. Although headline solvency ratios have fallen, with the minimum solvency standard covered an average of about two times, compared to about 2.75 times in 2003, many commentators had predicted a much worse position, caused by tougher reporting requirements.

Commenting on the findings, David Murray, an insurance partner at Deloitte, said: “The UK life sector hasn’t had a great deal to smile about in recent times, and there were plenty of gloomy predictions that the introduction of realistic balance sheet reporting would be another severe blow. Those predictions have proved largely unfounded.”

Under new capital requirement measures, Wesleyan and NFU report the strongest position. For some companies, new capital reporting requirements have resulted in an apparent decrease in the amount of free assets available to cover solvency standards. Deloitte argues that the lower solvency ratios shown in the graph below are driven very strongly by the change in reporting rules, not by any actual weakening in the sector. (Please see attached press release for graph)

In its report, Deloitte suggests that the adoption of Realistic Balance Sheets may have had a positive impact on M&A activity in the sector by providing better clarity and more transparency for investors and policyholders.

“Realistic Balance Sheet reporting provides a much more robust picture of a firm’s financial strength than the old regulatory balance sheet alone. This should improve policyholder and investor confidence and make the sector a more attractive investment proposition,” said Murray.

Ends 

Notes to editor:
A copy of the executive briefing titled “Life Offices’ Financial Strength Update” is available on request.

About Deloitte:
Deloitte & Touche LLP is the UK's fastest growing major business advisory firm. The firm is based in 21 UK locations, with over 10,000 staff nationwide and fee income of £1,246 million in 2003/2004. It is a member firm of Deloitte Touche Tohmatsu, a leading professional services organisation, delivering world class audit, tax, consulting and corporate finance services, with around 120,000 people in over 140 countries. Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity. 

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. 

The information contained in this press release is correct at the time of going to press.