City watchdog clears way for insurers to raid 'orphan' assets

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The Independent Online

The Financial Services Authority yesterday gave the green light for life insurance companies to raid billions of pounds from stockpiles of assets that have accumulated from generations of previous policyholders.

The Financial Services Authority yesterday gave the green light for life insurance companies to raid billions of pounds from stockpiles of assets that have accumulated from generations of previous policyholders.

These funds are known as "orphan" or "inherited estates", and the regulator has said companies can lay claim to them and buy out policyholder ownership rights of the assets through a practice called "re-attribution". Aviva, created out of a merger of Norwich Union, General Accident and Commercial Union, has an inherited estate worth about £4bn.

It said yesterday it would look at the claiming the funds for itself and its shareholders in the wake of new guidance from the FSA. Mike Urmston, the chief actuary at Aviva, said: "These proposals recognise that it is a legitimate approach to allow shareholders to buy the rights to inherited estates. We have been waiting for this and can now begin to look at the issue in a more serious way, to see whether we can consider action in this area."

Any attempt to lay claim to funds will meet with opposition from policyholder groups. Axa caused a furore in 2000 when it took steps to unlock its inherited estate, which it said belonged to shareholders. The matter ended in court after a protest from policyholders.

The FSA proposes that a policyholder advocate is nominated to take part in the discussions about ownership of assets. Mick McAteer, the Consumers' Association's principal policy adviser, said the proposals did little to stop companies "unfairly appropriating billions of pounds for the benefit of shareholders, at the expense of policyholders". Although a number of companies may make moves to buy out the rights to the assets, many will find it difficult to remove capital from their funds. All companies need some surplus assets to prop up policyholder payouts when investment returns are poor and fund new business growth. Three years of falling stock markets, in which most inherited estates have been invested, have left them with little spare capital.

Prudential has been trying to unlock its £6bn inherited estate for years, but in July it said it would not consider withdrawing assets. A spokesman said it was looking carefully at the FSA's proposals. The FSA has also backed away from forcing companies to stipulate how much policyholders' payouts will swing between one year and the next. The industry argued this would be too restrictive on investment strategies.

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