With-profits compensation shake-up on the cards


Insurance companies could be banned from using the inherited estates of with-profits funds to pay compensation to customers who have been mis-sold policies.

The currently rules allow firms to use money from the inherited estates – the surplus part of the with-profits funds – to meet any compensation payouts, such as endowment mortgage mis-selling refunds.

However, the financial regulator, the Financial Services Authority (FSA), has raised concerns that this practice may not be fair to policyholders.

In a consultation paper proposing the changes to the rules, it states: “Shareholders alone should bear the risk of such management failures.”

Legally, the inherited estate is owned by the insurer – hence the rules allow it to use the money to meet redress payments. But in most with-profits funds, the inherited estate has been built up over the years from previous policyholders, the investment returns from premiums and injections of capital from shareholders.

There is, therefore, an argument that the money within inherited funds belongs to policyholders. For this reason, insurers are required on an annual basis to consider giving back the “excess” of inherited estates to current policyholders – a process known as redistribution.

However, any changes to the current rules are unlikely to come into play for some time. The FSA will launch a consultation on this issue, and will report back at some point after 3 September 2008.

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