Every year, thousands of life insurance policies are cancelled early, causing their customers to lose hundreds of millions of pounds. Insurers often blame investors for failing to stick with their policies to maturity - scarcely surprising given the frequency of redundancy and divorce - but in many cases, the policies were unsuitable in the first place.
Many big insurers have fallen foul of the financial regulators for failing to control their salesforces. The list includes Scottish Widows, Legal & General and Norwich Union, which was this week forced to suspend 800 salespeople and retrain them.
The chief executive of Norwich Union is the current chairman of the Association of British Industry. Even more remarkably, the former chief executive of Legal & General, Joe Palmer, is the man charged with cleaning up the personal savings market.
The Labour Party has grave doubts about the industry's ability to strengthen investor protection through self-regulation. Its immediate concerns, aired in yesterday's debate in the Commons, are about personal pensions - a government initiative that amounted to a privatisation of part of the state retirement provision. By some accounts, up to half the estimated 6 million people may have lost out financially by taking out a personal pension policy with a life insurer.
The actual numbers that have suffered are almost certainly much lower but financial regulators are still trying to gauge the scale of the problem.
The Government backed the launch of personal pensions with a pounds 1.2m advertising campaign in 1988. It believed encouraging people to make their own provision would play an important part in curtailing the growing costs of the state earnings-related pension scheme (Serps).
Labour accuses the Government of encouraging people into the arms of unscrupulous pensions salesmen without first putting in place an effective system of safeguards.
Industry critics have two separate grounds of concern. The first involves the 500,000 or so people who have transferred their retirement benefits from an occupational pension scheme into a private plan with an insurer.
An officially-backed study by KPMG Peat Marwick, the accountants, suggested that salesmen had failed to follow proper sales procedures in nine out of 10 cases. The damage done to investors is thought to be much less than this alarming statistic suggests.
An 'early leaver' (from an occupational pension scheme) may have benefited even if he or she was not given the proper warnings. Even so, the compensation payable by the life insurer to those who have lost out is expected to run into many millions of pounds.
Additionally, it is feared that hundreds of thousands of low earners may be at risk because they left Serps. The rebate of National Insurance contributions that they receive for 'contracting-out' may be insufficient to meet the cost of charges on personal pensions.
An initial analysis by Coopers & Lybrand suggests that up to 2.5 million people may lose out in future. The real problem stems from April 1993 when the Government reduced the rebate and incentive for those contracting out into a personal pension. Pat Wynne, a partner with Coopers, has suggested the problem could disappear if the low earners are encouraged to switch back into the state scheme.
The failures of the life insurance industry are mostly those of incompetence rather than fraud. For too long, many insurers have employed poorly trained salespeople who are paid by commission and have to sell to make a living. Many have failed to make the grade, leading to an exceptionally high staff turnover and poor quality advice being given to consumers.
Financial regulators believe they have already taken many of the steps necessary to prevent a repeat of past abuses. Much tougher training and competency schemes are forcing insurers to rid themselves of poor salespeople and since 1990 their number has almost halved to 105,000.
Ironically, it is this tougher approach that has caused the bad publicity. Mark Boleat, director general of the Association of British Insurers, said: 'Bad publicity is occurring because (regulatory) action is occurring. Much of that action relates to historical problems.
Lautro, the life insurance regulator that is being replaced by Mr Palmer's Personal Investment Authority, accepts this. Kit Jebens, Lautro's chief executive, said: 'We have got to the really rather ridiculous position where there are very, very large improvements . . . and yet everybody's got the impression that . . .it's all as bad as it always was.'Reuse content