Norwich Union slashes policyholders' payout rates

Aviva, the UK's biggest insurer, yesterday heaped more misery on 1.6 million of its policyholders by cutting payout rates by 5 per cent.

The payout cuts follows reductions of up to 20 per cent in January, when a number of policyholders saw their bonuses scrapped entirely. A 25-year endowment policy would now pay out £56,595, compared with £59,568 in January.

Crushing losses on the stock market have reduced the amount of capital insurers have to pay as bonuses. But this latest round of payout reductions comes as the stock market begins to see signs of recovery.

Norwich Union, Aviva's UK brand, yesterday said it expected the return on its with-profit fund for the first half of 2003 to be around 7 per cent. This compares to an 8.5 per cent return in 2002 and 9.5 per cent in 2001, when the fund was heavily invested in equities.

In view of these improved conditions, Norwich Union has lightened the exit penalties - called market value reductions (MVR) - that it clamps on customers wanting to cash in their policy. These have been charged at a hefty 11 per cent in the past few months. Norwich Union yesterday said it would reduce this to 9 per cent.

Mike Urmston, chief actuary at Norwich Union, said: "The market recovery has worked through in the form of a lower level of MVR. On conventional policies, however, we have been paying out around 118 per cent of what has been earned, so some further adjustment to payouts is necessary for overall fairness."

Its 1.7m policyholders with unitised policies, which move more closely in line with the stock market, were yesterday told they would not face further bonus cuts. They have been receiving around 105 per cent of what the fund has earned.

"On longer-term conventional policies we still need to see payouts more in line with asset shares as the higher investment returns of the past are gradually replaced by the lower level of investment returns we are now seeing," Mr Urmston said.