Memorandum submitted by the Association
of British Insurers (ABI)
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.
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.
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.
10. Insurance companies' with-profits funds
present some specific issues. Such funds have inherited estates
(sometimesinappropriatelycalled 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
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
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.
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
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.