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Will Pru rue the day?

It could have been a blueprint for how to demonstrate to the marketplace that you are no longer interested in what it thinks of you. In one fell swoop, the Prudential has infuriated and disenfranchised virtually the entire IFA market, leading many to vow never to do business with it again.

How did it manage so effectively to cut the ties with those that it relies on to distribute its products?

Last week, it told IFAs of its intention not only to increase its critical-illness rates by as much as 40 per cent in some cases and move to a reviewable basis but also to apply the measures retrospectively to business still in the pipeline.

UK chief executive Mark Wood says: “The product was very keenly priced and tremendously popular with advisers, so much so that we have sold out at that price.

“This is a business decision based on the reality of this very fluid market and the volatile nature of the reinsurance market. The rate at which we have attracted new business has accelerated over recent weeks as others have repriced or withdrawn from the market.”

But IFAs are scathing of the life office&#39s decision to apply the changes retrospectively, especially as the Pru has an admin backlog of applications.

Andrew Oliver & Co IFA Andy Oliver says: “I have been in the industry 25 years. You think you have seen everything and then this comes along.”

One leading broker, Lifesearch, is so incensed by the move that it may take legal action. It has instructed solicitors Whitman Breed Abbott & Morgan to look into whether there are grounds to launch a class action lawsuit against the Pru and is inviting other IFAs to get involved.

Spokesman Kevin Carr says: “If all of an IFA&#39s clients walk as a result of this, there would be a significant impact on their earnings. You have also got the fact that IFAs will have to do the job twice for one lot of earnings. What the Pru has done is certainly unethical and unprecedented.”

Carr says the phones have been red-hot since the appeal for IFAs to come forward.

Another IFA says he will be sending a bill to Prudential head of distribution Nick Smith for the time he will have to spend sorting out the problem for his clients.

One possible explanation for the Pru&#39s actions is that it has run into difficulties with its reinsurance. This could either be that the high levels of business it was writing meant it exhausted its reinsurance capacity or that it was accepting new business applications without having adequate reinsurance cover in place.

Wood says: “The introduction of the new rates is based on a difficult commercial decision and such decisions are never popular but we have simply consumed our capacity to underwrite this business at those rates.”

For IFAs, the latter is probably a far more serious offence. They were placing CI business in good faith with a provider which, because of a potential lack of reinsurance, would be unable to fulfil the contracts.

Pru&#39s letter sent to IFAs confirms this. It said: “We have consumed the capacity to write business at current rates and must reflect changes in reinsurance terms, particularly on critical-illness cover.”

The irony is that the Pru never wanted to become a major protection player. It did so almost by default as over the last couple of months it did not raise its premiums by as much as the rest of the market.

The protection market is so price-driven and the products so largely similar that this is all it took for the Pru to leap over more established players such as Norwich Union, Legal & General and Friends Provident.

It was inevitable its systems would not be able to handle the massive inflow of business. The wonder must be that it continued to accept new business as the situation deteriorated.

The reality of the situation is that this gaffe will be likely to have long-term effects across product areas for the Pru. Dozens of IFAs have vowed never to place any business with the company again, not just in the protection arena but any type of product.

Surely, this cannot have been the intention of a company which until just a few years ago was one of the biggest providers with arguably the strongest brand name in retail financial services.

One IFA says the con-sequences are already being felt.

Alpha Financial Services technical manager Moira Kennedy says she approached the Pru for information, projections and illustrations for some of her pension clients. She was told by the Pru that this information would not be forthcoming, in the short term at least, because everyone was busy trying to sort out the protection mess.

Kennedy says: “From our point of view, they will never get another piece of business again. Personally, I just cannot trust them. One must ask, what future do they have? If they are such a major player, then why are they having these problems?”

Some have expressed the concern that the move could set something of a precedent for other providers.

Wickham Partnership partner Tony Joammou says: “It sets a dangerous precedent for other companies to ride rough-shod over what they are quoting. We could get another company trying to do the same thing.”

Whatever the long-term consequences, the significant damage to the Pru&#39s relationship among IFAs is certain. It will struggle to regain the confidence of advisers and as a result may struggle to maintain a presence in the UK market.

But then with the upper echelon in the Pru thought to have decided to focus much of its efforts on Asia and the US and largely ignore the UK market, maybe that was its intention all along?

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