Demutualisation proves costly for with profits policyholders
With Standard Life members voting firmly in favour of the demutualisation of the UK's largest mutual insurer, new figures from The Association of Mutual Insurers (AMI) have revealed the high price that with profits policyholders could ultimately be paying, writes Richard Eagling.
The research suggests that, when a mutual life insurer becomes a plc, holders of with profits policies receive an average payout of £14,000 less than if the organisation had remained mutual. The analysis by AMI looked at the twenty five year with profits returns over the past fifteen years (1992 - 2006) from six organisations which have demutualised; Clerical Medical, Scottish Amicable, Norwich Union, Scottish Widows, Scottish Provident and Friends Provident.
In 1992, the average payout from each of the six organisations was over £12,000 higher than both the average mutual payout and the average industry payout. Today, each of the six organisations sit amongst the bottom quartile in the market and in just one year (2006) policyholders of the demutualised insurers have lost on average over £26,000 on the value of their twenty five year with profits policy. In 2006 the average payout from a plc is £14,263 lower than the average payout available from a mutual insurer. This considerable difference in maturity value obliterates any financial gain from the average windfall payout offered to policyholders by those choosing to demutualise.
Shaun Tarbuck, CEO of AMI, commented: "When we started looking at the performance of the demutualised life insurers, we had not expected to see such a consistent pattern of decline in the value being delivered to their policyholders. Irrespective of market conditions, demutualisation seems to ensure policyholders lower returns which bear no relationship to the modest windfall payouts made to members at the time of conversion."
Tarbuck added: "In fact, in the most recent cases, the demutualised company effectively claws back the windfall payment within one year through lower investment returns." These latest findings follow earlier research from the AMI which highlighted that 65% of the UK population does not understand the reasons behind an organisation choosing to remain a mutual or convert to a plc.
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