Policyholders safe despite closure

One minute you are paying premiums on your personal pension to a reputable life company, writes Nic Cicutti. The next thing you know, it closes its doors to new business and sacks nearly all its staff. The question is whether this should be of concern to savers.

In a nutshell this is what happened to 90,000 policyholders with London Life, the Bristol-based insurer, this week. Many will be worried about their share of the pounds 2bn invested with the firm.

Nor are concerns confined solely to London Life policyholders. Research by Bacon & Woodrow, the consulting actuaries, concluded that half the 90-plus insurers in the market today will be out of business by the year 2000. If it can happen today to a company with a proud 186-year history, what hope is there for dozens of others?

Not much - although London Life suffered a 20 per cent drop in sales of its life and pensions products in the first three months of 1995, this matched industry averages.

So who is next? This is harder to predict, but Bacon & Woodrow's study suggested that smaller, foreign-owned firms - London Life is owned by the Australian insurer AMP - and many medium-sized companies are vulnerable.

The most important question, however, is what happens to policyholders' money if their company finally shuts up shop. Here, there is hope.

Eric Hodson, finance director at Clerical Medical, explains: "If a company closes to new business its funds should be safe. The Insurance Company Act of 1982 lays down rules as to how they must manage policyholders' money.

"All life offices have an appointed actuary, whose job is to make annual reports to the Department of Trade and Industry on that company's solvency.

"This is done in the basis of very conservative calculations, taking into account any possible liabilities a company may face in the future. The DTI has to approve those figures and if is not happy with them will require even more regular reporting, plus changes in how a company runs its business."

When a company's fund is closed to new business the actuary's job is to see that any assets are prudently divided among all policyholders - those whose policies mature today and those with 25 years to run. Everyone then gets a fair payout and no-one should lose out.