FSA proposes rules to protect unit-linked policyholders

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.

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.

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 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."