I've got just the policy for you, guv. It's a good little runner

It is the level of charges and surrender penalties that is the most important factor determining performance, rather than investment growth

Imagine that Ford launches a multi-million-pound advertising campaign to market a car with the quality and second-hand value of an Escort, but at the price of a Jaguar. The motoring press would tear it apart and a discerning British public, which likes to think it knows about cars, would leave most of the company's output in the showrooms. No big manufacturer can afford to ignore consumer buying power without getting a bloody nose.

There is, however, an industry where it is possible to sell poor-quality products at premium prices, and where regulators and consumer bodies have been puzzling for years, with no great effect so far, about why it happens and what can be done.

That industry is life insurance, whose showrooms are full of shiny new models which, when you investigate further, do not appear to have very much under the bonnet.

This week, there was an excellent example of how, in the insurance industry, a first-rate marketing campaign and a powerful brand name can overcome the drawbacks of having a list of products that leave much to be desired in performance terms.

The Pru announced a dramatic increase in sales of its long-term life insurance products, both world-wide and in the UK, helped, of course, by Prudence, the company's appealing new advertising image. The announcement came after the Independent's investigation last Saturday, to be continued tomorrow, into the performance of life insurance companies, using a new rating system devised by John Chapman, a former senior official of the Office of Fair Trading.

Mr Chapman wrote a series of hard-hitting reports on the life insurance industry before he retired this year from the OFT.

It so happens that the Pru languishes near the bottom of many of the performance tables, yet it is right at the top of the industry, and doing better every month, when measured by the value of the policies it sells. If customers were scrutinising the ratings tables, surely the Pru's sales should be on the slide?

This is not meant to be an exercise in bashing the Pru, which is a highly reputable organisation, suffering perhaps from the costs of having a large sales force, which may hamper its efforts to offer the cheapest products.

It shares the bottom of some of the tables with a number of other well- known names with substantial volumes of sales, including Royal Insurance, which has now merged with Sun Alliance, Sun Life, Friends Provident, Britannia Life and AXA Equity & Law (see table.)

In most other industries, the best would drive out the mediocre. Somehow, this separation of the wheat from the chaff does not appear to be taking place consistently in life insurance.

It is true that Equitable Life, a top performer, does have sales comparable with the Pru. But on the whole there is little obvious correlation between product quality and sales revenue.

One reason is that there has always been a great deal of confusion about what makes a good life insurance product. Counter-intuitively, perhaps, it is the level of charges and surrender penalties that is the most important factor determining performance, rather than investment growth.

Charges and penalties can reduce the yield on a policy by between 1 and 5 per cent a year, and in the case of early surrender, by 10 per cent or more. As Mr Chapman points out, it would take a truly miraculous investment performance for a company levying high charges to overcome the handicap and match the returns to policyholders of a company with low charges.

As well as confusion over what makes a good product, until recently there was an almost complete information blackout. Even now, charges and surrender penalties can be obscure and complicated, as with unit-linked policies, or be hidden completely, as in the case of with-profits endowments. The latter are one-sided contracts that allow insurance companies almost complete discretion in deciding final investment returns.

After pressure from the OFT and consumer groups, and after a great deal of huffing and puffing, the industry was finally persuaded to publish what amounts to a proxy value for its charges.

Since last year, companies have had to give projections of early surrender and maturity values. Since they are based on a standardised assumption of investment performance, variations in the cash values projected are a good indication of differences in charges and surrender penalties.

The great majority of policies are lapsed before maturity, making it vitally important to look at the values of policies at several different stages. Our tables rank companies on a combination of early, mid-term and maturity values, to give a fuller picture. These ratings tables cannot yet be regarded as perfect. The information supplied is still far from complete.

There are no mechanisms for ensuring that, over the life of a policy, an insurer sticks to the level of charges and surrender penalties assumed in the projections it makes when it sells a policy.

There are also a number of games companies can play to massage the figures and there is a strong case for tightening the disclosure system, by forcing publication of lapse rates to show which companies mis-sell the most policies. We might even learn from the French system, where there is an initial charge, an annual charge and nothing else to complicate comparisons.

Nevertheless, consumers are beginning to get enough information to pick policies on the basis of quality. Those who buy through independent financial advisers should also be equipped to ask tough questions whenever they are offered products which rank poorly in the tables - questions such as how big is your commission on this well-known dud?

When consumers really do begin to understand the merits of what they are buying, the pecking order in the life insurance industry should begin to change.

Investors in the shares of a life insurer would find the quality rankings of its products a good indicator of future sales success.

The test will be when big-name firms with poor products but good marketing campaigns find their sales falling rather than rising.

How life insurance companies rank

The top five ... and the bottom five

(lowest ranking at top)

Equitable Life Royal Insurance

General Accident Sun Life

Norwich Union Prudential

Standard Life Friends Provident

Scottish Mutual Britannia Life

Sources: John Chapman, The Independent, Money Marketing.

Measured across a range of 15 products.

News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
football
News
i100
Sport
sportDidier Drogba returns to Chelsea on one-year deal
PROMOTED VIDEO
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
film
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
News
i100
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
News
people
News
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
Tovey says of homeless charity the Pillion Trust : 'If it weren't for them and the park attendant I wouldn't be here today.'
people
Sport
Rhys Williams
commonwealth games
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little