An unfair test on the life insurers
At one point in his RSA lecture last night outlining the need for "a new industrial activism", Trade and Industry Minister Lord Mandelson talked about the role of the pension funds as providers of long-term capital to business, and how government needs to understand better how its actions and policies affect the way this money is invested.
Given that much of his speech was devoted to the need for joined-up government where one set of policies does not undermine others, it was an apposite comment. The Financial Services Authority said only this week that it was telling the life insurance industry to undergo another series of even more rigorous stress tests. But the higher the safety bar is set, the harder it is for these funds to invest in equities.
If these tests achieve anything at all, it can only be to make equity investment even more difficult for these funds, and further constrain the availability of long-term capital for the growth industries Lord Mandelson quite rightly wants to encourage. It is a high price to pay in order for the FSA to cover its back.
The sector is quietly - or not so quietly - seething at the FSA demand because it breaks the fundamental rule of good regulation, in that it is pro-cyclical. In essence, the industry has been asked to test what would happen if markets dropped by as much again as they have already in order to see if firms would have sufficient capital in such circumstances. But the test is so crude it fails to adjust for the complexity of life assurance and the fact that capital is tied up in areas such as life funds and non-life businesses.
It seems to play to the regulator's apparent view that life companies have the same business model and capital needs as banks, when they could scarcely be more different. It matters because there is always a danger the regulator could look at the results of these tests and unnecessarily direct the industry to raise more equity capital - not because the industry needs it, not because the capital is not desperately needed elsewhere, but so the regulator can sleep more easily, having ticked a box marked "reckless prudence".
