Written evidence submitted by the Association
of Mutual Insurers
CEO LETTER TO
FSA's Dear CEO letter and Legal Advice
1. Nearly 60 friendly societies and mutual
insurers received a letter from the FSA in October, setting out
its views on various aspects of with-profits business, and asking
firms to respond before the end of December.
2. The FSA has sought legal advice on the
extent of the interests of with-profits policyholders in the with-profits
fund. This advice has concluded that "the general position
is that the with-profits policyholders, in their capacities as
policyholders and as members of a mutual, will be entitled ultimately
to all or almost all of the assets in a mutual's long-term fund
after the mutual's contractual obligations in respect of policies
written into that fund have been satisfied".
3. The letter goes on to explain the FSA's
view that where there is not a material volume of with-profits
new business, irrespective of the amount of non-profit business
being written, then the firm could be deemed to have ceased writing
new business, and should therefore consider whether it should
distribute its excess assets to the with-profits members.
4. The FSA also says that if it is not possible
to effect new business on terms which allow the with-profits business
to run-off fairly then they may require the firm to close to new
5. The letter goes on to discuss what alternatives
there may be for a firm in this situation:
continue to write new non-profit
business for a limited period of time;
develop a new "participating"
type of non-profit contract;
a strategic investment option; and
seek the consent of with-profits
policyholders on how its capital may be used.
Our assessment of the letter
6. Many mutuals have been in business for
150 plus years. Most wrote business initially on a non-profit
business, and developed with-profits business for a limited period
(mainly from the 1970s to the 1990s), as a means of sharing the
excess capital they have built up over generations.
7. Clearly the firm has a responsibility
to protect the interests of its with-profits policyholders, as
it has a responsibility to protect the interests of all its members.
However, the FSA's stated view is that all the surplus in the
fund, including the present value of profits on the non-profit
business, should be distributed to the members holding with-profits
policies as these policies run-off.
8. We consider that the legal advice is
flawed, and it contradicts the advice that the industry has received,
as well as the detailed examination of practice within the sector
that has been undertaken. This supports the case that often all
forms of business have been written into a common fund, and that
the assets in the fund are held in perpetuity, for the benefit
of current and future policyholders, as well as providing the
working capital to allow the mutual to fund new business and product
development (on the understanding that policyholder funds are
replenished over time).
9. Friendly societies that provide Holloway
contracts (a form of income protection product which also pays
bonuses out of excess premiums) have also been caught up in the
issue, even though they are specifically excluded from the relevant
FSA rules (COBS 20). FSA argue that this is on the basis of the
same duty to treat policyholders fairly.
Implications for the sector
10. Each Board will need to satisfy itself
that it has a coherent strategy. Where it is writing stable/ material
volumes of with-profits new business the FSA letter does not present
a significant obstacle.
11. For the majority of mutuals, who are
not writing material volumes of with-profits now, even where they
have an effective business plan to write other forms of business,
there is a greater challenge. Some journalists have assessed the
impact on the sector as cataclysmic, and our legal advice concludes
that the letter is "highly likely to drive with-profits mutuals
out of business even where they have viable streams of non-profits
business". Overall we expect a range of possible outcomes:
(a) The legal advice received by some of the
larger mutuals suggests the practices and norms within the firm
are sufficiently robust to provide an exception to the "general
position" as set out in paragraph 2 above.
(b) Some firms are exploring new forms of product
with FSA that will enable them to write participating variants
of current non-profits products.
(c) For some there is a significant possibility
that they will be forced to close to new business and reattribute
excess capital to their policyholders, which as the recent Norwich
Union exercise has shown is a costly and drawn out process which
destroys policyholder value.
(d) Some may conclude that they should explore
12. Overall, whilst firms have still to
finalise their situation, we expect the letter will intensify
further pressure for consolidation, shrink the size of the mutual
insurance sector, and reduce consumer choice.
Are there any alternatives?
13. The industry has been carefully drafting
alternative solutions that do not diminish policyholder rights,
but which provide a viable future for a mutual.
14. There appears to be a willingness across
all political parties to strengthen the mutual sector, and to
signal support for mutual insurers and friendly societies. FSA's
position is in stark contrast to that. But at the moment this
is seen as an issue that should be resolved between FSA and the
15. We conclude that political pressure
on FSA is necessary for them to take a more enlightened view on
the relevance of the mutual model and to reconsider their position.
24 November 2009
6 This might include protection policies without any
investment element, or the Child Trust Fund. Back