Claiming your share in the great insurance give-away

Nearly 3 million policyholders with the insurer Norwich Union are being offered a windfall worth at least pounds 500. Steve Lodge answers your questions

Norwich Union, one of the UK's biggest insurers, this week confirmed it plans to pay a windfall of free shares worth at least pounds 500 to nearly 3 million policyholders.

The move, revealed in last week's Independent on Sunday, is likely to be followed by more windfall announcements as other insurers look to shed their mutual status - either by joining the stock market or by being taken over. While there has already been a stampede of building societies announcing plans to demutualise and pay windfalls, the Norwich Union flotation would be the first by a mutual insurer.

Here are answers to the basic questions:

How much will I get?

There will be a basic handout of free shares worth perhaps pounds 500. To qualify for this you need to have a Norwich Union policy which makes you a "member" of the insurer. These include endowments, other life insurance policies such as term assurance (basic life insurance), personal pensions and annuities.

Such policies need to have been in force before 2 October - last Tuesday - and to still be in force on a date next spring yet to be announced. If the policy is "secondhand" (see later question) you need to have bought it before 2 October.

Two million customers hold products that do not carry membership rights and so will not get any windfall. Non-qualifying policies and products include motor, house, contents and private medical insurance policies, tax-free PEPs and unit trusts.

Holders of both unit-linked and with-profits versions of life insurance and pension policies will qualify for the basic handout. But holders of with-profits policies will receive extra shares linked to the value of their policy. For some policyholders, this will mean handouts worth perhaps as much as pounds 2,500.

Handouts will be in the form of a number of shares, but their exact value will depend on what price the stock market puts on the shares.

When will I get the shares?

Probably by next summer. The shares will be given out when the insurer joins the stock market but before that members need to vote on the demutualisation proposals, and there are also a number of regulatory hoops to go through.

Can I still take out a policy to qualify for the free shares?

No. Policies taken out from 2 October will not give membership rights and therefore will not make you eligible for the free shares. Buyers of "secondhand" policies also face the same cut-off date. With these, you buy a policy that the original holder no longer wants, take over paying the premiums and then collect the payout when the policy matures or the original holder dies. But unless you bought the policy before 2 October the entitlement to the free shares stays with the original policyholder.

What happens if my policy is about to mature?

If a policy matures or is cashed-in between now and a date in next spring when the vote will take place (not yet fixed) the member will lose their entitlement to the free shares. Norwich estimates 15,000 policies might mature during this time. But the insurer says payouts on policies that mature or that are triggered by the death of a policyholder during this time will be increased to reflect the windfall they won't get. Endowment policyholders who were thinking of giving up their policy to raise some cash between now and the vote meeting are being advised to consider selling the policy in the secondhand market instead. This way the policy should remain in force, allowing the original policyholder to get their shares. According to Beale Dobie, one of the biggest dealers in this market, a Norwich Union endowment policyholder could typically get 10 to 15 per cent more than the insurer's cash-in value by selling in the secondhand market. But not all policies will be suitable for resale.

What happens next?

Members should have been sent an outline of the proposals this week. A circular with further details of the share handout will be sent to members in spring 1997, in advance of the meeting to vote on demutualisation. A customer information line has been set up by Norwich Union on 0645 444818 (calls charged at local rates).

Is this a good thing?

The insurer says demutualisation is the way forward and is in the best interests of its members.

The mutual form of ownership - where holders of life insurance and pension plans also own the business - is said to be "inappropriate" as a growing number of customers are not members.

The handing out of free shares will enable these original members to retain a financial interest in the performance of the business.

As well as the windfall sweetener, the insurer says with-profits policyholders also stand to benefit from an untangling of the business which will accompany the demutualisation. At present with-profits policyholders effectively own Norwich's general insurance business, which leaves the performance of their policies exposed to what can be volatile returns from this business.

Against these points is a worry that customers of the converted insurer might get a worse deal in price and value because of the insurer's need to pay dividends to its new shareholders. The Independent, the Independent on Sunday's sister paper, this week published research by a former official of the Office of Fair Trading, which showed that mutual insurers have been much more likely to give top payouts on life insurance savings policies than those companies quoted on the stock market.

Nevertheless policyholders should not forget that Norwich will still want to remain competitive to attract customers - whether on the payouts on its endowment policies, the price of its life insurance, or the premiums on non-membership policies.

Who's next?

Norwich Union's move is unlikely to be the last among the mutual insurers. Many more windfall-yielding takeovers and conversions are on the cards. Tipped names include Scottish Widows, Scottish Amicable, Friends Provident and Scottish Provident.

But windfall-hunters should be wary of taking out a policy simply in the hope of a handout. Many policies most likely to qualify for any windfall can be big financial commitments, and performance can vary significantly from company to company. Windfalls may not amount to much in relation to the cost or value of the policy. And some will be in the form of policy bonuses whose full value may only kick in when a policy matures.

Some speculators may also consider buying secondhand endowments. But these cost thousands of pounds and the firms in this market say prices have been pushed up by recent windfall rumours and special bonus announcements. If you want to know more about the secondhand market, Beale Dobie, a major dealer, has a free guide to Selling or Investing in Traded Endowment Policies (call 01621 851133).

A smaller-scale way of playing the windfall game is to buy shares in one of a number of investment funds that invest in secondhand endowments. There are four available - Kleinwort Endowment Policy Trust, Kleinwort Second Endowment Policy Trust, BZW Endowment Fund and the Life Offices Opportunities Trust. The last specialises in policies likely to yield windfalls or special bonuses. Investments in these funds start at as little as pounds 25 a month.