Insurance customers 'to lose out'

Aviva is one of the firms considering the future of "orphan assets"

A consumer body is threatening legal action over fears insurers' plans to use surplus assets will penalise policyholders.

The Financial Services Authority (FSA) has confirmed firms can use extra cash in their with-profits funds to subsidise the rest of their business.

Which? argues this unfairly reduces the assets available to policyholders.

Aviva, which is considering the future of Norwich Union's £5.4bn surplus, welcomed the FSA's clarification.

The FSA set out its position regarding the treatment of companies' so-called "inherited estates", or "orphan assets" in a letter to Clare Spottiswoode.

This is the worst possible advert for the insurance industry Peter Vicary-Smith, Which?

She was appointed by Aviva to represent the interests of 1.1 million policyholders in the proposed Norwich Union "reattribution".

It is her job to negotiate the size of the windfall policyholders would receive in return for giving up their rights to the assets.

The FSA has confirmed that its rules permit companies to use orphan assets to subsidise new business, finance strategic assets and offset some tax charges, thus reducing the amount available for policyholders.

But it said it would consult on whether it was fair for companies to use the surplus money to cover the cost of misselling claims.

'Fair incentive'

Clare Spottiswoode said she was very disappointed by the FSA's response.

"Policyholders have an expectation that the estates will be used for their benefit or distributed to them," she said.

"My job is to represent the interests of policyholders and I will do all I can in the negotiations to achieve a fair incentive payment for them, but the FSA's ruling makes that more difficult," she added.

In March 2007, the Prudential said it was also considering a possible reattribution of its £8.7bn surplus.

We don't think that policyholders lose out by the announcement Sarah Wilson, FSA

Consumer group Which? believes the FSA's approach will mean five million Norwich Union and Prudential policyholders could see potential windfalls reduced by thousands of pounds.

"The FSA has once again failed to address the needs of policyholders and sided with those it is meant to regulate," said Which? chief executive Peter Vicary-Smith.

"This is the worst possible advert for the insurance industry at a time when confidence in the financial services industry is at an all-time low.

"We will be exploring all legal avenues open to us that may help to protect policyholders," he added.

Status quo

The FSA denied that its letter to Ms Spottiswoode represented a change of policy, adding it had merely confirmed the status quo.

"We don't think that policyholders lose out by the announcement," said FSA director Sarah Wilson.

"We have not made a new ruling. We have reaffirmed the reattribution process put in place in the rules that we introduced in 2005," she added.

Aviva welcomed the FSA's clarification of the rules, which it said "clears the way for us to conclude negotiations in the near future and see if we can make a fair offer to eligible policyholders".

It hopes to put proposals to a vote in "early 2008", with windfalls potentially following later in the year.

In November, the Prudential said it had not yet decided whether to proceed with its reattribution, but that it hoped to make an announcement in the first half of 2008.