FSA reminds with-profits bonus cutters to treat customers fairly

by Gill Montia

Story link: FSA reminds with-profits bonus cutters to treat customers fairly

Insurance companies are being warned that they must consider their obligation of fairness to customers when cutting the value of bonuses on with-profits funds.

In its 2009 Financial Risk Outlook report, the Financial Services Authority states that “falling asset values combined with low interest rates are a particular issue for with-profits firms”.

The report goes on to suggest that “there is a risk that the mitigating actions that firms take to deal with their financial pressures may result in policyholders not being treated fairly”.

So far this year, Friends Provident has cut bonus rates on its with-profits policies by up to 20%, attributing the move to a weak investment performance by its with-profits fund, which lost 10.5% during 2008.

In addition, Aviva-owned Norwich Union has cut bonuses on its with-profits policies by up to 15%, its fund having lost around 12% last year.

Savers have also been losing out as insurers adjust their Market Value Reductions to reflect the current financial environment, meaning that some policyholders who want to access their cash early achieve lower surrender values.

The report also warns annuity providers that they must make sure they have “sufficient reserves and capital” to cope with people living longer.

The regulator states that “firms that do not adequately allow for improvements in mortality (particularly for older ages) will be under pricing their annuity products, overstating profitability and understating reserves”.