As life offices try to distance themselves from traditional with-profits, they are distancing them...
As life offices try to distance themselves from traditional with-profits, they are distancing themselves from their clients. The zeal with which they promote the next generation of with-profits is no doubt admirable but it comes at the expense of talking about existing policyholders. These people have put huge amounts of money into products. Ned Cazalet of Cazalet Consulting estimates there is still some £70bn in traditional with-profits bonds.
Where does it leave the policyholders and the intermediaries who advised them at a time when the Government, the regulator, the press and life offices themselves are cheerfully telling us traditional with-profits do not work?
The picture is one of life offices interested in market share rather than providing sustainable returns to investors. That seems to go against the grain of with-profits, which are supposed to provide sensible, smoothed returns over time. Furthermore, the high commission levels offered have done nothing to improve the public image of the intermediary.
There are those who argue the problem is not the sales and marketing techniques but the markets themselves that are to blame because they fell. But this is to ignore a note that the Institute of Actuaries produced in 2000 that pointed out the bonuses on offer appeared to be based on marketing rather than the reality of expected returns.
The issue now is one of a lack of trust between policyholders and life offices. This is being increased by the fact that those in with-profits face large penalties if they cut their losses and run.
Whatever else large market value reductions do, they trap customers into an unhappy relationship with a life office that does not really want to discuss the embarrassing subject of with-profits. And if markets rise, life offices are likely to be using the gains to rebuild their balance sheets rather than hand them over to policyholders as bonuses.
That is £70bn worth of individuals who are unlikely to look favourably on the life industry and are likely to pass on their opinions to their friends and families. It is not a great environment for life companies looking for new clients and new money as and when markets improve.
Life offices need to realise that closing down their traditional with-profits to new business is not the end of the affair. There is a long and difficult job ahead to rebuild consumer and intermediary trust and confidence in the financial services industry.
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