Select Committee on Treasury Written Evidence


Memorandum submitted by the Association of British Insurers (ABI)

OVERVIEW

  1. The Association of British Insurers (ABI) represents the collective interests of the UK's insurance industry. The ABI has around 400 companies in membership, providing 94% of domestic insurance services sold in the UK. ABI member companies account for almost 20% of investments in the London stock market.

  2. Although a lot of work has already been done in the banking industry, this is the first time that the issue of recovering unclaimed assets for public use has been raised in the context of insurance. The insurance industry will take a pragmatic approach to any proposals, taking into account the interests of its customers. The industry's assets are held on behalf of policyholders under the rules and supervision of the Financial Services Authority (FSA).

  3. Insurers are concerned that customers should receive the payments they are due, and have therefore sought out lost customers with considerable success. Some are unfortunately not found, but nothing should be done which prevents them being paid if they eventually come to light.

  4. The scale of unclaimed assets cannot be quantified until the definition of these assets is clarified. This is not an easy task in relation to products that are long-term in nature and not subject to the regular activity normally associated with bank accounts. Experience from other countries suggests that the sums raised are generally considerably lower than early estimates. There are also a number of important legal and technical questions that need to be addressed before firmer conclusions can be reached. This paper lists some of them.

INDUSTRY EFFORTS TO CONTACT POLICYHOLDERS

  5. The insurance industry makes extensive efforts to track down the rightful beneficiaries of unclaimed policies. Tracing lost customers is an essential element of "Treating Customers Fairly". When there are clear dates by which a claim might have been expected (eg for endowments and pensions), insurers work hard to make contact with policyholders via the last known address. If that fails, and the company knows the customer's National Insurance number, the Department for Work and Pension's forwarding service is used to try to re-establish contact. Similarly, if a customer's bank account details are known, insurers will approach the customer through the bank. If all these approaches fail, companies can place unclaimed policies on the Unclaimed Assets Register, which the insurance industry was instrumental in establishing. This allows policyholders and their professional advisers to track down missing policies.

  6. The industry has been preparing a new Good Practice guide to help companies improve their handling of unclaimed policies. A draft will shortly be published for wider consultation.

OWNERSHIP OF INSURANCE INDUSTRY FUNDS

  7. Life insurance products, because of their broad range and long-term nature, are very different from banking products. The legal relationship between a life insurance company and its policyholders is also fundamentally different from that between a bank and its depositors. Premiums paid to a life insurer become part of the assets of the life insurer. The insurer then invests the money to generate revenues to enable it to meet its contractual liabilities under the policies it has written, under the regulation and supervision of the Financial Services Authority. Reflecting the pooling inherent in insurance, the assets associated with unclaimed policies are not dormant but support the company's obligations to policyholders and pensioners. The directors of a life insurance company cannot legally authorise payments to third parties in respect of unclaimed policies.

  8. The issues arising if a lost policyholder reappears are important. In order to protect the interests of the majority of policyholders, the liability to pay out if a late claim is made needs to remain with the related assets. Otherwise, the result will be lower returns for savers and pensioners. Similarly, provision needs to be made for the legitimate expectations a late-claiming policyholder might have of investment returns, as so many insurance products are investment vehicles. In addition, there would be important implications for insurance companies' regulatory capital requirements if assets and liabilities were separated, which would need to be fully explored with the Financial Services Authority.

  9. An unclaimed policy might be described as a policy under which a person has a current legal or beneficial claim which cannot be paid because the person cannot be traced, but continues to be a liability of the insurance company.

WITH-PROFITS FUNDS

  10. Insurance companies' with-profits funds present some specific issues. Such funds have inherited estates (sometimes—inappropriately—called orphan estates), comprised of assets legally and beneficially owned by the insurance company, not policyholders. The inherited estate, defined as the total value of assets less the total value of liabilities, provides the fund with working capital and allows investment flexibility. Occasionally, the long-term fund can be restructured, via a process known as reattribution. This is carefully regulated, and overseen by the FSA and the courts.

  11. The inherited estate of a with-profits fund does not fit the definition of unclaimed policies, and should not form part of any further discussion of the issues surrounding such policies.

PENSION SCHEMES

  12. Another potential source of confusion concerns the ownership of assets within pension schemes. The insurance industry manages many defined benefit pension schemes. The assets of such schemes belong at all times to the trustees. Transferring such assets on the grounds that pensions had been unclaimed could weaken pension funds at a time when many are already under significant pressure.

MUTUALITY

  13. Mutual insurers and friendly societies offer help and protection to particular groups of people, often of relatively modest means. It is a fundamental feature of mutual insurance that all assets are used for the sole benefit of policyholders.

QUANTIFYING UNCLAIMED POLICIES

  14. The scale of unclaimed policies in the insurance sector is hard to estimate. Overseas schemes to recover unclaimed assets have often raised only a fraction of the sums initially estimated. The Irish estimate of €60 million proved three times too high. Work is in hand by the ABI to try to provide a better estimate of the potential scale in the UK. The task is complicated by the fact that fund values vary with investment returns. Furthermore, many insurance products have no fixed point at which a claim for payment must be made. Definitions therefore need to be drawn up making clear when a policy is to be deemed unclaimed, taking account of the circumstances of the life and pensions industry.

THE USE OF ASSETS

  15. Any scheme to utilise unclaimed assets from any industry needs to be rigorously assessed for effectiveness and for value for money. For example, individual sums may be so small that the costs of transfer may exceed their value. Costs need to be transparent and appropriately attributed. The Treasury has suggested that funds are needed to develop programmes for young people, for financial education and to combat financial exclusion. The insurance industry already contributes significantly towards the goal of long-term improvements in financial capability via a sizeable and growing levy to the FSA. Individual companies are also voluntarily supporting such work via their Corporate Social Responsibility programmes. It would seem sensible to apply any further money raised from any part of the financial services sector in the same way.

February 2007



 
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