The Financial Services Authority (FSA) has given the green light to mutual insurers to split their with-profits funds so that cash can be used for working capital.
The FSA set out its position after the mutual insurance industry asked if it could set aside a section of with-profits funds for “mutual capital”.
The FSA said a carve-up could be considered by mutuals facing a decline in with-profits business, but only if it did not lead to unfair treatment of existing with-profits policyholders.
“The firm would need to ensure its proposals are fair in the light of its particular circumstances and also give its with-profits policyholders an opportunity to vote on the proposals,” Jon Pain, the FSA’s managing director of supervision, said in a letter to the Association of Mutual Insurers and Association of Friendly Societies (AFS).
Mutuals facing a tail-off in with-profits business had also asked the regulator if they could begin selling new types of products, such as pure life policies. These policies would have the features and pricing of “non-profit” policies, but would also grant participation rights such as the right to share in a potential dividend.
“We recognise that some firms which continue to sell significant volumes of more traditional with-profits policies may also wish to sell the new products alongside these,” said Pain.
“[However] this raises potentially difficult conflicts of interest between the two classes of policyholder and firms will need to consider carefully how those can be addressed.”
The AFS said allowing mutuals to use their with-profits funds for working capital would give the industry more certainty.
“As mutuals, we cannot turn to the stock market to raise capital,” said Martin Shaw, AFS general secretary.
