View more on these topics

Riders on the with-profits

The pressure on with-profits products remains high, exacerbated by poor asset values. The recent change to the FSA&#39s resilience test was a pragmatic move, given market falls, but it did highlight the current situation and the plight of weaker offices as their solvency came under pressure.

The purpose of the resilience tests is to ensure that life offices are strong enough to withstand adverse investment market movements. In effect, the tests are an examination of “what if” scenarios. One such test was to check that the life office would remain solvent if equity values dropped by 25 per cent from their current level.

The problem for a life office actuary is that, if the resilience test could not be met, the office might be forced to move to other assets, such as cash, where the 25 per cent test would have a lesser or no effect. The consequence would be forced selling of equities at a bad time for consumers and leading to further declines in equity values – a vicious circle.

The revised test allows the life office to take account of the rolling three-month performance of the market. For example, if equity prices are 10 per cent below their three-month average, life offices will only need to test against a further 15 per cent (25 per cent less 10 per cent) fall.

As we might expect, the impact of this change is more significant for weaker offices. The strongest offices remained solvent without the relaxation and a few have very substantial explicit resilience reserves.

Free-asset ratios have taken several hits over the last couple of years. According to company returns, the majority of free-asset ratios were in the teens at the end of 2000. By the end of 2001, most were in single digits and current industry estimates have them another 2 or 3 per cent below that level.

Free-asset ratios are not the whole story, however. They often disguise the true position by the use of adjustments. Two factors often employed are to take account of future profits in the valuation of assets and to use financial reinsurance to sell future margins in return for cash now.

Although it may be legitimate to use such approaches – and at Prudential we do not – it is important to appreciate how financially strong a life office is when directing business to it.

Different life offices react in various ways to declining asset values. Some have sufficient financial strength to ride out the storm. Others choose to introduce market value reductions at potentially substantial levels. The challenge is to deliver good value to the consumer while observing current asset values.

Of course, all this should be done while taking account of policyholders&#39 reasonable expectations and avoiding nasty surprises. The stronger funds and robust offices are inevitably best placed to react in consumer-friendly ways.

Appropriate questions to ask of providers are regarding their policies on MVRs. Does the office apply MVRs automatically? Has its policy changed recently and, if so, in what way? Is its current approach in line with its long-term policy?

Ultimately, returns to policyholders are delivered by way of bonuses. As a result, the bonus philosophy of each provider is extremely important. How are bonuses set? Have bonuses changed recently? How often does the office set bonuses and has it changed bonus levels mid-year recently?

Inevitably, bonus levels have declined to reflect poorer returns in recent years. However, the stronger offices have been better placed to smooth returns to consumers and to avoid substantial bonus changes from one year to another.

In summary, reliance on relaxations in resilience tests, approach to determining free-asset ratios and bonus philosophy should all be considered by the advisers when selecting a with-profits provider.


Brown commits extra £1.4bn to housing

The Government has pledged to increase spending on housing by £1.4bn to £4.7bn in 2005 to tackle problems over supply and affordability although advisers say it may not have much impact on the overall market.It says much of the increase is to deal with the severe difficulties in London and the South-east. This area will […]

Call to align all the reviews – Prudential

Prudential is calling for the Government to work with regulators and the industry to align all current reviews into a single package of measures in its response to Sandler.The life office, which says it supports the aims of the review, believes that simplification of financial services is key to closing the UK savings gap and […]

Slow process

This week I received maturity papers from Friends Provident for a client&#39s 25-year with-profits endowment policy.I dusted down the original file and as you would expect the plan had produced a good return – £21,759 as against the projected value of £12,710 from the original quotation.But perhaps more interesting was the case processing. The acceptance […]

Property boom set to continue

The property boom looks set to continue, with the majority of buyers believing any rise in interest rates will be merely a temporary blip and will not temper the market, according to Yorkshire Bank.Its latest housebuyer survey reveals that almost two-thirds of homeowners believe the value of their property will rise in the next year, […]

Trusts and Taxations

Take a look at the trusts and trustee taxation video – The definition and classification of trusts. Once you’ve viewed the boxset, visit our Test Centre to test your learning and get your CPD certificate. View here


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm