FSA weighs in for cost of capital
UK Financial Services Authority (FSA) chief executive, John Tiner, has spoken out forcefully in favour of a cost-of-capital approach to Solvency II quantitative capital requirements.
Speaking at a conference organised by the Association of British Insurers (ABI) in April, Tiner said, "The cost-of-capital method seeks market-consistent pricing for unhedgeable risks ... by looking to the capital market for the provision of capital to insurance companies. All insurance companies have capital and have access to EU capital markets. The market-consistent price is the cost of capital that needs to be held to cover those risks."
Tiner characterised his opponents as seeking a defined percentile technical margin in order to "support the run-off in liabilities without recapitalisation". Criticising the "arbitrary, non-intuitive assumptions" used to model claim distributions in run-off, Tiner argued that cost-of-capital could not only be simpler, but also would encourage the growth of secondary insurance markets. "The FSA argues that recapitalisation should be the main aim of the regulatory design of technical provisions," he said.
Support for the FSA view may come from current UK trends. After the capital crisis that hit the UK with-profits industry in the late 1990s, a wave of fund closures swept the industry, leaving a total of 43 closed funds of significant size according to FSA figures. Now these funds are undergoing a wave of recapitalisation, led by Resolution Life and the Pearl Group. However, the damage to policyholder expectations and consequent legal fallout at closed fund Equitable Life continues to provide ammunition to continental critics of the UK.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Risk management
Bank ALM tech still dominated by manual workflows
Batch processing and Excel files still pervade, with only one in four lenders planning tech upgrades
Many banks ignore spectre of SVB in liquidity stress tests
In ALM Benchmarking exercise, majority of banks have no internal tests focusing on stress horizons of less than 30 days
Quant Finance Master’s Guide 2026
Risk.net’s guide to the world’s leading quant master’s programmes, with the top 25 schools ranked
ALM Benchmarking: explore the data
View interactive charts from Risk.net’s 46-bank study, covering ALM governance, balance-sheet strategy, stress-testing, technology and regulation
Staff, survival days, models – where banks split on ALM
Liquidity and rate risks are as old as banking; but the 46 banks in our benchmarking study have different ways to manage them
CME faces battle for clients after Treasuries clearing approval
Some members not ready to commit to 2026 start date; rival FICC enhances services
AI and the next era of Apac compliance
How Apac compliance leaders are preparing for the next era of AI-driven oversight
Responsible AI is about payoffs as much as principles
How one firm cut loan processing times and improved fraud detection without compromising on governance