Scottish Equitable becomes latest insurer to impose early exit penalty

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Scottish Equitable, the life insurer owned by the Dutch company Aegon, yesterday emerged as the latest group to confirm it has introduced a penalty on customers who wanted to terminate their policy early due to the falling stock market returns.

The company joins a rapidly lengthening list of insurers to introduce the penalties, which are known as market value adjusters (MVAs) and were just an unknown clause in customers' contracts until about a year ago.

The increase in the number of MVAs came as the Financial Services Authority announced that due to the difficult stock market conditions, it was relaxing some of its rules which actuaries must adhere to in order to make sure funds were solvent and secure.

The FSA said that it would temporarily relax one of its "resilience" tests. This means that appointed actuaries will not be forced to sell equities in order to make sure that the fund could withstand a hypothetical 25 per cent drop in the stock market coupled with a 3 per cent rise in long-term interest rates.

William Hewitson, head of the FSA's actuary department, said: "We believe this scenario is unlikely in current conditions, so it would be inappropriate if insurers had to switch out of equities into fixed-interest securities at a level which could be to the longer-term detriment of policyholders."

The stock market gloom has affected practically all major insurers, most of which have now imposed MVAs. To date, only Standard Life and Liverpool Victoria, the friendly society, still say they have no plans to introduce the exit penalties.

MVA is calculated on a case by case basis. At its upper end, it would cost a customer 12 per cent of the value of their policy to release the money prematurely. Scottish Equitable said yesterday that an average levy is 3 per cent. As with all MVAs, those who keep the policy until it matures are not penalised.

MVAs first came onto consumers' radar screen when Equitable Life introduced an MVA, which went as high as 15 per cent but currently stands at 7.5 per cent.

While MVAs are unpopular with policyholders, many in the industry think they are prudent readjustments of the value of customers' policies to be in line with the fall in the underlying value of their stock market investments.

John Turton, a senior pensions adviser at the brokerage BestInvest, said: "Any company with their brain bigger than the size of a pea is going to have an MVA, especially on policies which have run for a duration of less than three years."

Most insurers impose MVAs on a case by case basis, with investors who took out a policy less than two years ago set to loose the most proportionately. This reflects the steep fall in with-profits investments since 1999, which on average are down by 5 per cent.

ADJUSTING FOR MARKET VALUE

Company MVA in %

Scottish Equitable up to -12

(owned by Aegon) average -3

Legal & General -10

Scottish Mutual -10

Scottish Widows -9

Equitable Life -7.5

Co-Operative Insurance Society -6

Royal & SunAlliance –10 with-profits

-6 unitised investments

Prudential at its discretion

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