The Securities and Investments Board's report yesterday establishes the ground rules in a structured enough way but there is still a long way to go.
One of the most worrying features of the affair, it now emerges, is that a large part of the costs could fall not on shareholders in insurance companies but on their policyholders' long-term returns.
Until last month the stock market was expecting a cost to the insurance industry of pounds 500m to pounds 1bn. A fortnight ago, investors began to brace themselves for anything up to pounds 2bn in compensation costs as details of the SIB review seeped out. It now seems that insurers could be looking at perhaps half as much again, a level of damage not yet recognised in life and composite insurers' share prices. The numbers just keep on creeping up.
There is no need for investors to panic just yet, however, since the poor old policyholder may be in for a double whammy - as a victim of mis-selling and an indirect contributor to the costs.
Companies selling with-profits pension policies are likely to pay the compensation from their life funds, eating into their free reserves. These are currently at healthy levels of pounds 30bn to pounds 40bn for the whole industry. Most companies should be able to avoid an immediate knock-on effect on policyholders, though a handful may have to cut their bonus rates.
But in the long term, any damage to reserves does have an impact on the overall returns to a life fund's policyholders, which will be lower than they otherwise would have been.
The life and composite insurers have been remarkably coy about the scale of provisions for future compensation, with only Refuge announcing a figure (of pounds 11.5m). What is clear is that existing provisions are hopelessly inadequate.
Smith New Court estimates that the scandal will cost pounds 200m for the Pru, pounds 100m apiece for Legal & General, Allied Dunbar and TransAtlantic, and perhaps pounds 20m each for Eagle Star, Britannic, London & Manchester, Refuge and United Friendly. But since these figures are based on an industry total of pounds 2bn they are almost certainly on the low side.
This is going to be a messy, long drawn-out business. For starters, there will be a prolonged squabble between insurers and those independent financial advisers (IFAs) that survive over how to share out contributions to the compensation fund. The long- term effect can only be to hasten the dramatic consolidation among IFAs and life insurers already in progress.Reuse content