Traditionally, these have been used to pay policyholders' bonuses. But in the case of insurance companies that are not mutually owned, the fashion increasingly is to allocate ownership of these orphan assets to shareholders rather than policyholders. And what's wrong with that given that it is shareholders' capital which has contributed to the success of the life fund?
There are several potential problem areas here. Although the surpluses distributed in this way have to be negotiated with and approved by the Department of Trade and Industry, as often as not the chief actuary who makes the calculation of what the fund can afford is also a senior employee of the company. In Britannic's case, the chief executive, in fact. This immediately raises a potential conflict of interest between his duties to shareholders as opposed to policyholders.
Second, the surpluses have often built up because of a conservative distribution policy by the company, whereby the bonuses it pays out to policyholders are modest by comparison to the investment gains being made by the fund. Members of a mutual insurer can say that all the money in their life fund belongs to them. If a way is then found to unlock surpluses in the fund, as happened with Scottish Amicable in its takeover by Prudential, the assets are theirs.
In some cases it is more complicated than this, because, as with L&G and, Britannic argues, itself, the surplus identified has come not just from better investment returns from with-profits business, but also from shareholders' capital in the life fund. Britannic says the money comes from business written before the with-profit fund was set up. Even so, the argument still applies: if shareholders are going to grab a slice of the cake where does that leave the legitimate interests of policyholders? The orphan asset issue seems as good a reason as any for shopping with a mutual every time.