Bloomberg News

With-Profits' Managers Reviewed on Conflicts, History, FSA Says

October 29, 2008

Senior managers of U.K. companies that handle 31 million special life-insurance policies paying an annual return will be reviewed on how well their companies communicate with customers and manage conflicts of interest, an official with Britain's financial regulator said.

Sarah Wilson, the Financial Services Authority's insurance industry leader, said managers of the so-called with-profits funds will also be examined on how well they understand historical contracts.

``Our starting point in conducting the review is not that significant changes are needed to the regime,'' Wilson said today in a speech published on the FSA's Web Site. ``What we want to explore now is how firms are actually operating the regime on the ground.''

The FSA earlier this week responded to a report by a parliamentary committee that accused the agency of not doing enough to prevent conflicts of interest in the with-profits market, which are supported by 400 billion pounds ($616 billion) of assets in the U.K. The agency has been under pressure from Which? Ltd., a consumer group, that contends insurance companies distribute less of their surpluses to policyholders.

Conflicts of interest between policyholders and shareholders can occur when companies build up surpluses accumulated in life insurance funds.

Aviva, Axa Payments

Aviva Plc (AV/), the U.K.'s largest insurer, in February proposed letting policyholders in its life insurance unit share 2.1 billion pounds and pay shareholders a ``special bonus'' of 230 million pounds.

Which argues that the FSA should forbid companies from using the surpluses to pay for shareholders' tax or subsidizing new customers.

Wilson said today that it was corporate boards' responsibility to manage conflicts of interest and that the FSA would review how well senior managers do this.

Axa SA (CS), Europe's biggest insurer, gained approval to split 1.7 billion pounds of surplus funds between policyholders and shareholders in 2000. That followed a court challenge by Which that sought to recover more of the funds for policyholders.

Axa's case and Equitable Life Assurance Society's near- collapse in 2000, where a court ruled it had to pay policyholder bonuses that Equitable said it couldn't afford, prompted the FSA to overhaul its rules on with-profits. The regulator said insurance companies that offered the policies must have independent input about policyholders' interests.

Insurers' business models are already under FSA scrutiny. The regulator has eased capital rules for insurers in the wake of financial market turmoil, according to the Association of British Insurers.

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.


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