Norwich Union deals fresh blow to endowment policyholders

Norwich Union is set to deliver a fresh blow to endowment policyholders next month when it starts notifying investors of possible shortfalls on their mortgages.

The news is a particularly bitter blow as Norwich Union was thought to be one of the most robust life assurance companies whose policies were considered virtually "bullet proof."

It had promised policyholders it would make up any shortfall between the endowment and the mortgage, as long as it achieved a return of at least 6 per cent.

In Norwich Union's last round of letters, sent out two years ago, only 6 per cent of its 1.3 million customers were told their fund was in trouble and other savings needed to be made to meet the mortgage loan.

But collapsing stock markets mean the chances of earning a 6 per cent return is extremely remote. As a result, the number of "red" letters, telling policyholders that the endowment is currently highly unlikely to pay off the mortgage, will almost certainly rise.

Mike Urmston, Norwich Union's chief actuary, said: "The 6 per cent promise depends on the interest we earn on our free reserves. It clearly hasn't done that. It is not an issue at the moment but we do require future investment earnings."

Standard Life, which also promised to make up any shortfall if the policy grew by at least 6 per cent, says none of its 1 million with-profits customers are currently facing shortfalls.

Simon Douglas, managing director of marketing at Standard Life, said: "The promise is long term and many policies are not maturing for many years. We still think the promise is appropriate.

"But if the return is lower than 6 per cent, the investment will need to be topped up. There will be some people who will have to make up the difference. There is no current problem for with-profits policyholders."

But Standard Life is writing to its 400,000 unit-linked policyholders to warn them they are unlikely to benefit from the promise.

Some investors are already receiving updated projection letters from insurance companies which show that in the past two years the investment they hoped would pay off their mortgage has slipped from "green" (likely to pay off the borrowed sum) in to "red". Nearly 9 million people are waiting to hear from insurance companies as to whether they need to make additional provisions.

Recent figures from the Association of British Insurers in May, showed that only 39 per cent were fully on track. The situation is thought to have deteriorated since then.