Life companies are currently being criticised by consumer groups
for holding too much back from policyholders and for using these
surplus assets for their own benefit.
A with-profits fund is made up of policyholder premiums,
investment returns and shareholder contributions. The inherited
estate is that part of the fund that exceeds the firm's realistic
liabilities to policyholders. It provides working capital for the
with-profits fund and is used to level out returns between good and
bad years. But it may also be used for the life company’s own
purposes, to strengthen its capital base or to fund future growth
plans.
Policyholders past and present have continuing rights in the
inherited estate. For this reason, the Financial Services Authority
restricts what the life company can do with it. The firm may
negotiate with its policyholders to give up their rights in return
for payment (known as a reattribution). Detailed rules in the FSA
Handbook govern the process, including the appointment of a
policyholder advocate to represent eligible policyholders'
interests.
But there are tensions between the interests of policyholders
and the interests of the life company and its shareholders.
A particular concern is the use of inherited estate money to pay
compensation to victims of mis-selling. This is currently allowed
under the rules but has been criticised as inconsistent with the
principle of treating customers fairly. In the FSA's 2008/9
Business Plan, the regulator said it will be re-consulting on this
point.
The Treasury committee's inquiry will be much broader. It is
asking for written evidence on a wide range of issues, including
the extent to which life insurance companies should be allowed to
use inherited estates to subsidise corporate activities or to pay
compensation costs.
But it also asks for comments on the reattribution process,
including the appropriate division of funds between policyholders
and shareholders, the role and responsibilities of the policyholder
advocate and the approach taken by the FSA.
Want more content like this? This story was written by the insurance and reinsurance legal experts at Pinsent Masons, the law firm behind OUT-LAW.COM. We've recently launched a new section, legal info for Insurance and Reinsurance, giving free legal information to anyone working in that sector.
