Issues Arising from the Equitable Life Case. Mike Shelley

Transcription

1 Issues Arising from the Equitable Life Case Mike Shelley

2 Background to UK Regulation The 1982 Insurance Companies Act does not seek to regulate directors either in the design of contracts or in the determination of premium rates. Emphasis is on continual monitoring by the Appointed Actuary who has a duty to report annually and on a "whistle blowing" basis in the event that the directors fail to act on his recommendations. This is regarded as providing a more effective degree of monitoring than can realistically be expected of the FSA.

3 Insurance Companies Act and Subordinate Regulations The reserving standard incorporates the requirement to make proper provision for all liabilities on prudent assumptions that shall include appropriate margins for adverse deviation of the relevant factors. There is also a requirement to make provision for PRE and not just for contractual liabilities.

4 Policyholders' reasonable expectations (PRE) 1982 Act does not contain any definition of PRE. Any interpretation is a matter for the Courts but until the recent Equitable Life case, there had been no cases which have tested the concept. The industry, the Regulators and the actuarial profession, have built up an informal framework over the years to determine what are PRE.

5 PRE - the Regulator's view The fair treatment of policyholders vis a vis shareholders Any statements by the company as to its bonus philosophy and the entitlement of policyholders to a share in profit, for example, in its articles of association or in company literature The history and past practice of the company General practice within the life insurance industry Fair treatment amongst different groups and generations of policyholders

6 Background to the Equitable Life case At retirement part of the accumulated fund (including all bonuses) may be taken in cash form and the balance used to purchase an annuity. Most with-profits pensions policies written by Equitable Life up to July 1988 contained GARs. The bonuses granted to Equitable Life policies are in two forms: reversionary bonuses terminal bonuses (called "final bonus" in Equitable Life' current terminology) Equitable Life has no free assets

7 Background to the Equitable Life case Equitable Life' position was that the guaranteed minimum annuity amount at retirement was determined by the application of the GAR contained in the policy to the guaranteed fund. The position of policyholders was that the guaranteed minimum annuity amount at retirement was determined by the application of the GAR contained in the policy not just to the guaranteed fund but also to any final bonus amount.

8 PRE for GARs - FSA view Any final bonus added at maturity for contracts containing GARs might be lower than for contracts which did not contain GARs - Mr Martin Roberts (Director, Insurance) letter to all managing directors of insurance companies on 18 December 1998

9 PRE for GARs - Actuarial Profession view... In this case the policyholder is likely to receive the full value for the funds built up to support the policy, regardless of whether they take a cash option or pension option under their policy. The final bonus rates for individual policies will be set so that the accumulated fund equals the cost of the annuity provided. The "guarantee" may seem to be lost.. - actuarial position statement - March 1999

10 The House of Lords Judgement Gave judgement in favour of policyholders and against Equitable Life. Final bonuses are not bounty. They are a significant part of the consideration for the premiums paid. The provision for guaranteed annuity rates was a good selling point

11 The House of Lords Judgement Equitable Life thought that if the case went against it, it could declare a differential bonus which varied according to whether the policy included GARs. The House of Lords determined that this suggested route was not open to Equitable Life, because the object would still be to eliminate as far as possible any benefit attributable to the inclusion of a GAR in the policy.

12 Equitable Life Response Immediately announced putting itself up for sale temporary reduction in benefits No buyer was prepared to take on the open ended liabilities to GAR policyholders Closed to new business Infrastructure was sold to Halifax Group 500m immediate payment 250m performance bonus 250m on a compromise agreement

13 Legal Opinions Nicholas Warren QC advised the House of Lords judgement can not be reopened non GAR policyholders may be able to claim compensation for mis-selling Ian Glick QC advised non GAR policyholders have an arguable case for compensation Financial Services Act 1986 Misrepresentation Act 1967 common law duty to take reasonable care

14 Equitable Life Response Benefits to policyholders reduced no reversionary bonuses Jan-June 2001 terminal bonuses reduced 16% pension, 14% life A Market Value Adjustment 10% A new Court action to remove GAR policyholders' entitlements in return for average increases of 17.5% non GAR policyholders lose right to compensation for mis-selling and receive an increase of 2.5%

15 Impact on the life industry The House of Lords' judgement differed in important respects from what had become the accepted wisdom on PRE company conducts its affairs, including its new business and investment strategies, with due regard for its financial resources - GN1 directors have discretion to reduce terminal bonuses groups of participating policies are appropriately and equitably distinguished The Judgement took account of the particular circumstances of Equitable Life

16 Profession's response Position Statement renamed and withdrawn Monitoring compliance (peer review) of Appointed Actuaries Committee of Inquiry to consider adequacy of professional guidance monitoring compliance with professional standards Financial Condition Report Guidance Notes revised no dual role of Chief Executive and Appointed Actuary

17 The Commons Treasury Committee Inquiry Findings consider whether the actuarial guidance provided by the F&IA was appropriate at the time The relationship between firms' Appointed Actuaries and management boards, and with the body of policyholders, is in need of review consider whether statutory accounts and regulatory returns should draw upon the same information and assumptions We do not believe that the auditing arrangements for the statutory accounts and, in particular, the regulatory returns of life offices were adequate

18 FSA Review of With Profit Business The extent of discretion available to management over the operation of with-profits funds and how that discretion is exercised; Improvements in the transparency of published information about with-profits funds; Better information for policyholders about the progress of their investments, Greater clarity about investment strategies and the way in which terminal bonuses are determined, and The principles which underpin the requirement for firms to have due regard to the interests of their customers and to treat them fairly.

19 FSA Review of With Profit Business sub-projects Transparency in Policyholder Communications Unfair Contract Terms Governance and Discretion over the operation of with-profit funds Disclosure to Customers, and Regulatory Reporting Inherited Estates The Interests and Fair Treatment of Customers

20 FSA options for Appointed Actuaries Role discontinued Role continues with reduced conflict independent review preparation of a financial condition report limit on appointments

21 Treasury Independent Inquiry Into Equitable Life The Government believes it is now in the public interest to have a wider, independent review to identify any lessons to be learnt for the conduct, administration and regulation of life assurance business; The Inquiry will not comment or offer advice on the merits of any compromise deal proposed to Equitable Life policyholders; nor will it review past judicial decisions in relation to Equitable or prejudge future decisions properly taken by the Courts

22 Issues Arising from the Equitable Life Case Mike Shelley