A new set of proposals mooted by the FSA today will force insurers to demonstrate that writing with-profits new business will protect consumers’ interest.
The regulator is concerned that a “substantial minority” of firms failed to secure enough capital to cover the cost of acquisition of with-profit new businesses and plans to nail providers who write new “loss-leading” with profits business.
The FSA argued that existing laws are not enough to discourage companies from making price promises that they struggle to keep resulting in erosion of value of with-profits fund. This exposes the policy holders to “material detriment”, it observed.
The new proposal says: “A substantial minority of firms have been writing new business into their with-profits funds that is loss leading in itself – that is it is priced in such a way as to make it attractive to advisers and/or customers but it will never break even – or not enough of it is being sold to cover the cost of acquiring it.
“In both cases the consequence is that the new business being written erodes the value of the with-profits fund. This, in turn, means that over time there is less money available to distribute to with-profits policyholders.
“We believe that, given these findings, the rule as it is currently framed does not necessarily achieve the intention of preventing erosion of the value of the with-profits fund.
“In other words, it gives scope for minor or ‘immaterial’ detriment. Our concern is that over time even minor detriment, when aggregated, has the capability to become material detriment”.
The consultation paper titled ‘Protecting with-profits policyholders’ is the result of a commitment made by chief executive Hector Sants to evaluate how firms implement rules in Cobs 20, also prompting a With-Profits Regime Review.
The paper also proposes to curtail the provider’s ability to apply Market Value Reductions (MVR) on the basis of surrender volumes only. This will ensure that Market Value Reductions can only be applied if the value of underlying assets is lower than the face value of the policy.