The Financial Services Authority (FSA), the UK regulator, is relaxing its insistence that life assurance companies publish target ranges for bonus payments from with-profits policies. Payouts from the with-profits policies have plummeted in recent year, amid weak markets and tighter funding rules for insurers.
After lobbying from the industry, the FSA will now not require insurers to set targets limiting the amount pay-outs change from one year to the next. Instead, insurers will have to state how they plan to smooth payments to customers when investment returns fluctuate. “The proposed changes should not diminish the protection that policyholders will gain,” the FSA’s head of insurance, David Strachan, said in a statement.
With-profits products offer customers guaranteed returns even during market falls because the insurer keeps back returns in the good years to smooth bonus payments in bad years. But in a severe downturn, guaranteed policies can become a drain on the insurer’s finances, especially when the regulators are pressing simultaneously for tighter funding rules. The FSA’s target ranges for payouts can now be calculated using a basket of policies as well as individual policies, which was originally proposed.
The regulator is also proposing that companies can buy out policyholders’ rights to any surplus in the with-profits fund rather than be forced to automatically redistribute the surplus to them. Until now, insurers have been free to decide how much they pay out to policyholders. Companies have cut bonuses or shut their with-profits funds altogether and the regulatory is clamping down.
Insurers have until November 15 to respond to the new proposals. The FSA hopes to implement them in the first half of 2005.