Life assurance companies have been put on notice that if they lure investors through sharp sales and marketing practices they should make provisions in their accounts to pay disappointed customers what they thought was being offered.
The Society of Actuaries and the Department of Enterprise, Trade and Employment have written to all life assurance companies operating in the Republic suggesting that they may have to set aside a further 10-20 per cent in reserves to meet customer expectations. If enforced, this could have serious financial repercussions for many life companies.
The letter, seen by The Irish Times, specifically refers to the sale of with-profits life assurance policies. It mentions those offering very high annual bonuses in the first year of the policy - but failing to explain fully how these returns are calculated and how the policy will fare after that.
The Department of Enterprise, Trade and Employment said it also had potential concerns about "wider market conduct" with regard to the marketing and promotion of with-profit bonds, which it may raise with individual companies. The letter notes, for example, that a product could be sold through the advertising of very high annual bonuses, in some cases as high as 9 per cent.
But investors might not understand that in most cases the 9 per cent figure was not a realistic return to expect. And in some instances - without proper explanation - the bonus figure may be inflated by the company bringing forward part of the terminal bonus, normally awarded at the end of the policy.
Where companies continued to mislead investors to win new business, as in the case of this example, the letter states that the appointed actuary should make reserves on the assumption that the policy carried a 9 per cent bonus throughout. "In this example this would be likely to add probably 10 per cent to 20 per cent to reserves," it states.
It further cautions against dubious sales practices, particularly where investors are given an indication that there will be no exit penalty for early encashment of policies. The company actuary has been advised to make similar provisions where this impression is wrongfully given to investors.
Most life assurers have cut annual bonus rates paid on with-profits policies following stock-market volatility, with the average now being paid at around 5 per cent.
This week Hibernian introduced its Celebration Bond for 2002, a with-profits policy which is currently offering an introductory bonus ranging from 5.5 per cent to 7.5 per cent, depending on the amount of money invested. After the first year, the annual bonus rate is expected to fall to around 5 per cent, according to the company.
A spokesman for Hibernian said its products complied with UK regulations, which demanded greater transparency in the marketing and advertising of products to investors.
