Eagle Star forced to top up endowment mortgages
Thursday 09 October 1997
Andrew Verity examines what may be a widescale problem for the industry.
Eagle Star is to top up unit-linked endowment mortgages for thousands of its customers because its charges have been much higher than policyholders were led to believe.
The company believes that other life offices will have to follow suit. A spokesman said: "The vast majority of the life offices are in a similar position. Expenses were higher than policyholders were shown when they bought the policies."
In a move which is likely to cost the company millions of pounds, Eagle Star has written to customers admitting that high charges mean many customers will have less than they need when their endowment matures.
The company is using its own funds to boost the amount going in to unit- linked endowment policies, savings policies linked to stock market assets which are designed to pay off a mortgage when they come to maturity.
Whereas Eagle Star usually invests pounds 100 for every pounds 100 of contribution, it will invest up to pounds 170 to correct the problem. The rescue operation is thought to be designed to pre-empt more drastic action later should industry regulators intervene.
Tens of thousands of homeowners who took out unit-linked endowment policies in the late 1980s and early 1990s with other life companies could also face shortfalls in the amount needed to pay off their mortgages.
The problem stems from controversial ways of showing how much the life office would take out of policyholders' savings in expenses and by how much their savings would grow.
Lautro, which regulated the industry until 1994, dictated that all providers had to show potential buyers a standard set of charges to take a policy. These were much lower than almost all life offices charged.
Life offices also tended to assume optimistic returns from investments. Premiums depended on how much investments grew. Higher returns suggest lower premiums, giving the life office a competitive advantage.
Nigel Webb, marketing director at Equitable Life, said: "The danger is with these products that people want to pay the lowest premium. But it could have a lower premium because in fact it is making a more optimistic assumption about investment growth."
Life assurers Legal & General and Guardian Financial Services, said yesterday they were reviewing their endowment policies. Legal & General admits a "small minority" of policyholders may need to be told of a mortgage shortfall.
Endowment providers sold more than 500,000 unit-linked endowments every year until 1993.
Eagle Star claims that when the policies were sold, all but one office, Equitable Life, had expenses which were higher than the standard rates they were forced to use by Lautro.
Some companies used their own charges to work out how much in premiums a company would have to pay. But others, such as Scottish Widows and Standard Life, felt pressured into offering lower premiums than other offices.
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