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10.47 pm
The Economic Secretary to the Treasury (Ruth Kelly): I welcome once again the opportunity to speak about life insurance issues, and I congratulate my hon. Friend the Member for Brent, North (Mr. Gardiner) on securing the debate. As I am sure he appreciates, the life insurance industry is currently being examined closely from various directions—not just from the perspective of the Department of Health. It is right that hon. Members with an interest in these matters should try to make sure that Ministers are aware of their views on developments.
It may help if I run through the general background to the issue. The inherited estate, also called orphan assets or orphan funds, arises as a natural consequence of the smoothing of investment returns, which is such a significant part of the with-profits concept. In years when investment returns are good, a percentage of those investment returns is retained within the fund instead of being added to annual bonuses, so that in a year when investment returns are poor, bonuses can be supplemented from those retained funds.
However, in the long bull market in equities in the 1990s, some companies found themselves with significant surplus assets over and above those needed to meet not only the bonuses that they had already guaranteed but any future discretionary terminal bonuses. In some cases, the funds have been allowed to accumulate over such a long period that they have effectively passed from one generation of policyholders to another, hence the term "inherited estate".
My hon. Friend mentioned some of the sums involved, which are indeed huge, and he set out some of the uses of orphan assets. The inherited estate can act as the insurer's working capital, giving the business greater stability. That can act in policyholders' best interests: it provides the investment flexibility to enable greater exposure to higher risk assets such as equities, which over the long term should deliver higher investment returns; it facilitates the smoothing of bonus rates; it provides cushioning against a sudden or prolonged downturn in investment returns; and it can be used to support the costs of writing new insurance business, or can be invested in better services for policyholders.
As my hon. Friend said, however, questions then arise about how the funds are quantified, who actually owns them and how and when they should be distributed. That situation is further complicated for some life companies by demutualisation, which leads to the end of ownership of the fund by policyholders and to the introduction of shareholders who then also claim an interest in the inherited estate.
As my hon. Friend knows, the principles governing the attribution of the inherited estate between policyholders and shareholders were set out in a statement on 25 February 1995 by the then Minister with responsibility for consumer affairs, who was responsible for insurance matters within the Department of Trade and Industry, which then had responsibility for the life insurance industry. Those principles have been accepted by subsequent Governments.
Where a distribution is to be made from the surplus in the long-term fund, or rather from the inherited estate, it is common practice to make distributions to policyholders and shareholders in the following proportions: 90 per cent. to policyholders and 10 per cent. to shareholders. That is subject to variation where there is clear evidence, whether it is based on the company's circumstances, statements or practice, that a different proportion is appropriate in respect of the surplus arising from a particular part of the business. The main difference between the situation in 1995, when those principles were set out, and today is the existence of the Financial Services and Markets Act 2000 and the Financial Services Authority. The Government are no longer the regulator; that role is now taken by the FSA.
The FSA also follows the principles set out in the ministerial statement made in 1995. My hon. Friend raised the case of AXA. When AXA Equity and Law took its proposed attribution of its inherited estate to the courts for approval, the FSA made a witness statement that included a further statement of the principles generally to be followed in respect of proposals that are different from the circumstances contemplated in the 1995 statement. More recently, as he has noted, the FSA has launched a with-profits review, including an issues paper under the heading "Process for dealing with attribution of inherited estates", which was published in October 2001. The results of that consultation will feed into the overall conclusions of the with-profits review, which should, I think, be available in spring this year.
The options for review are wide ranging. Broadly speaking, they range from modification of the status quo to more radical alternatives. A modified status quo would see reports from an appointed actuary plus either an independent actuary or independent expert coupled with FSA scrutiny and greater disclosure to policyholders of the progress of the company's proposals. Alternatively, the roles of negotiating on behalf of policyholders and scrutinising proposals from a regulatory point of view could be combined within the FSA. As a variation on that alternative, an independent actuary or independent expert could be appointed as the policyholders' negotiator, leaving the FSA solely with its regulatory scrutiny.
The other options on which the FSA has consulted are either to have a proxy negotiator acting on behalf of policyholders, with the responsibilities of the FSA and of an independent actuary or independent expert left unchanged, or to have consultation with policyholders on a company's proposals in a manner that is sufficiently public to allow other interested parties to contribute.
Mr. Gardiner: Those are the proposals that are set out in the issues paper, but my hon. Friend will know that the negotiator who is acting on the policyholders' behalf is said to be there in order to obtain the best possible deal. Of course, that is based on a presumption that a deal should be done. Does not she agree that, until we move from the issue of a process in which somebody negotiating on the policyholders' behalf is looking to achieve a deal, rather than to say that there may be no deal on the table, and until the issue of valuation is addressed, it will be impossible for us to move forward from that point?
Ruth Kelly: I understand my hon. Friend's point, but I am sure he agrees that transparency is an important step
forward, and that moving along that road will mean a significant improvement for policyholders. I look forward to his contribution to the FSA review.The introduction of more open consultation with policyholders as a body raises difficult questions about commercial confidentiality and possible delays. My hon. Friend has raised several anxieties about that and I listened to his comments with interest, although I do not understand exactly how to get around the problem of commercial confidentiality when trying to encourage contributions from as wide a range of parties as possible. Perhaps we will discuss the matter after the debate.
The Government know that the Consumers Association has consistently argued that ownership of the inherited estate needs to be established before attributing or reattributing all or part of the surplus assets. The Consumers Association also disputes that the attribution of the inherited estate in the AXA case conformed with the 90:10 principle, as my hon. Friend said earlier. However, I may disappoint him by not making a definitive statement on those issues tonight.
When an insurer presents proposals to the regulator on its inherited estate, they must be considered on their individual merits, bearing in mind the general principles that I have outlined, to which the regulator and the Government have already subscribed.
It is right that orphan assets are used to smooth investment returns, but that does not automatically mean that policyholders have a right to draw them down in times of difficulty. Orphan assets should have a proper use, partly to cushion the company from unforeseen circumstances in future. If surpluses go too low, that opens the company to risk in the event of a sharp fall in the stock market, or another external event. However,
I understand my hon. Friend's comments about the rightful demands of policyholders and the need to take their interests into account.I am sure that a wide range of views has been put to the FSA in response to its issues paper on inherited estates. Attributions and proposals to buy out policyholder interests in an inherited estate are typically very lengthy processes and involve complex technical and actuarial considerations. None of that makes transparency or communicating what is happening to policyholders or their representatives any easier. Some of the information provided to the regulator as part of the process will inevitably be market sensitive and it may not be possible to share it with policyholders. However, the FSA is actively considering how the process of negotiation and the scrutiny of proposals can be made more transparent as part of its with-profits review. I await its findings with interest.
Outside the regulator, we have the Sandler review that the Treasury commissioned into the structure of the UK retail investment market. It is too early to speculate about its recommendations, especially as it has been established as an independent review.
However, much activity touches directly on the nature and scope of the life insurance industry and the products that it creates and markets. That should go some way towards reassuring my hon. Friend that we take the matter seriously. It is important to recognise that the FSA, as the regulator of the insurance industry, seeks to operate fairly within its statutory objectives and is moving to improve the regulation of insurance—
The motion having been made after Ten o'clock, and the debate having continued for half an hour, Mr. Deputy Speaker adjourned the House without Question put, pursuant to the Standing Order.
- Adjourned at two minutes to Eleven o'clock.
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