NU dresses up the big fat zeros

Insurance companies have had a hard time in the past few years. There have been accusations of pension mis-selling, problems with endowment policies linked to mortgages, and a general collapse in the investment assumptions on which they had designed and sold their products.

But even now they seem to find it hard to be straightforward with their customers. 

Consider this extract from a letter on policy anniversaries to Norwich Union customers holding 'with profits' endowment policies. Under the name of chief executive Gary Withers, it reads: 'As you may have read already, investment markets performed well in 2005 on the back of good returns in 2003 and 2004. These improved returns are leading to greater stability in bonus rates and payouts. We have maintained our regular bonus rates in 2006 at the same level as last year.'

That sounds like  good news, and the kind of letter an investor would be cheered to receive.  When they turn the page however, recipients find the reality is rather different. The rates that NU is so proud to have 'maintained' are zero per cent on the sum assured and  0.05 per cent on the previously attached bonuses.  What could be worse than 'maintaining' these rates?

There is a good reason for these lousy bonuses but you won't find it in the letter. It is that previous management teams at NU and elsewhere underestimated the ferocity of the downturn in financial markets. Coupled with the continued impact of low interest rates, this miscalculation led them to pay out too much. At the time there were good marketing reasons for being generous but they overdid it.
The bonus in earlier years were too high, and badly depleted the company coffers. Now that markets are recovering, NU is seizing the opportunity to claw some of the money back.

This is nothing to be ashamed of. The  evening out of the fluctuations caused by  good and bad markets  is one of the main features of 'with profits' endowment policies. What NU ought to be ashamed of though is its inability to tell its customers the plain, unvarnished truth. Rebuilding trust, a favourite theme of the insurance industry, requires honesty, not spin.

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