Life companies are currently being criticised by consumer groups for holding too much back from policyholders and for using these surplus assets for their own benefit.
A with-profits fund is made up of policyholder premiums, investment returns and shareholder contributions. The inherited estate is that part of the fund that exceeds the firm's realistic liabilities to policyholders. It provides working capital for the with-profits fund and is used to level out returns between good and bad years. But it may also be used for the life company’s own purposes, to strengthen its capital base or to fund future growth plans.
Policyholders past and present have continuing rights in the inherited estate. For this reason, the Financial Services Authority restricts what the life company can do with it. The firm may negotiate with its policyholders to give up their rights in return for payment (known as a reattribution). Detailed rules in the FSA Handbook govern the process, including the appointment of a policyholder advocate to represent eligible policyholders' interests.
But there are tensions between the interests of policyholders and the interests of the life company and its shareholders.
A particular concern is the use of inherited estate money to pay compensation to victims of mis-selling. This is currently allowed under the rules but has been criticised as inconsistent with the principle of treating customers fairly. In the FSA's 2008/9 Business Plan, the regulator said it will be re-consulting on this point.
The Treasury committee's inquiry will be much broader. It is asking for written evidence on a wide range of issues, including the extent to which life insurance companies should be allowed to use inherited estates to subsidise corporate activities or to pay compensation costs.
But it also asks for comments on the reattribution process, including the appropriate division of funds between policyholders and shareholders, the role and responsibilities of the policyholder advocate and the approach taken by the FSA.
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