Memorandum from the Wesleyan Assurance
1 ABOUT WESLEYAN
1.1 Wesleyan Assurance Society, founded
in 1841, is a mutual life assurance company offering specialist
financial advice to hospital doctors, GPs, dentists, teachers
and lawyers, through its principal distribution brands Wesleyan
Medical Sickness, Wesleyan for Teachers and Wesleyan for Lawyers.
1.2 The Wesleyan Group has in excess of
£4 billion of funds under management as at 31 December 2007.
1.3 Wesleyan is one of the strongest with-profits
insurers and has a history of good with-profits performance.
2 EXECUTIVE SUMMARY
2.1 The considerations in relation to the
inherited estate are different for proprietary and mutual companies.
2.2 For mutual companies, the inherited
estate is the primary source of capital as there is no access
to shareholder funds. This "mutual capital" has built
up over many generations, maybe even at times when there were
no with profits policyholders. Similarly, at some point in the
future there may again be no with profits policyholders, but the
mutual capital will still be needed to support the ongoing business
of the mutual.
2.3 This capital should be regarded as being
for the benefit of both current and future policyholders, and
as long as the mutual has a viable and sustainable future it should
be retained or else used to grow or enhance the business for the
benefit of both current and future policyholders.
2.4 It is important that regulators make
allowance for the distinctive features of mutual insurers.
3 RESPONSES TO
3.1 The regulatory definition of an inherited
estate in a with-profits fund.
We have no issue with the FSA definition of
"inherited estate" (an amount representing the fair
market value of the with-profits assets less the realistic value
of liabilities of a with-profits fund).
3.2 The extent to which life assurance companies
should be permitted to diminish inherited estate in order to subsidise
corporate activity, including financing new business, making strategic
investments, paying shareholder tax and paying the costs of compensation
For mutual insurers especially, we strongly
believe that the inherited estate is the appropriate source of
capital for the items listed. Strategic investments need to be
carefully assessed to ensure they do not diminish the security
of existing policyholders and add value to the with profits fund.
For mutuals, as the inherited estate is the primary
source of capital, it should be viewed as available to grow the
3.3 Whether allowing life assurance companies
to use inherited estate to subsidise corporate activity has any
adverse effects on competition.
We believe that this ability is highly beneficial
to competition within the industry, and indeed essential for companies
in the mutual sector.
3.4 The principles that should guide the division
of inherited estates in 90:10 funds between policyholders and
shareholders upon reattribution of the estate
As a mutual insurer we would not wish to comment
on this point.
3.5 The appropriate sharing of inherited estate
between current and future policyholders
In our view, the inherited estate belongs to
both current and future policyholders. In normal circumstances
the current generation of policyholders should have no expectation
of any significant distribution from the inherited estate as they
did not take out their policy with any such expectation. They
do however benefit from the existence of the inherited estate
and should expect to pass it on to future generations.
In certain circumstances, support from the estate
may be appropriate to promote the aims of the company and stimulate
new business, and (for mutuals) promote the benefits of mutuality,
as long it does not diminish policyholders' security or the long
term aims of the business.
3.6 Whether policyholders' reasonable expectations
of distributions from inherited estate should be zero or have
a positive value
Policyholders' reasonable expectations of distributions
from the inherited estate of a company with good prospects for
future new business should be zero, unless the company has previously
announced that some or all of it will be distributed.
Where a company is closed to all new business
(or has seen or is seeing a significant decline in new business
so that it is not expected to require all of its inherited estate
in the foreseeable future) there should be an expectation of a
gradual distribution of the inherited estate.
Otherwise with-profits policyholders' reasonable
expectations should be that they will receive an amount based
on their asset share, and in line with the firm's published Principles
and Practices of Financial Management (PPFM), which sets out how
the firm treats these customers fairly.
3.7 Whether any distribution of benefits from
the inherited estate should be made in a single payment or phased
over several years.
Most with profits funds have been in existence
for many years or decades, and, unless they are closed, they may
expect to exist for many years in the future as well. In that
context, any action to distribute some of their strength can justifiably
be seen as a gradual, long term course of action and not as a
immediate windfall for the current policyholders. This also allows
the fund to ensure the ongoing security of the fund, particularly
if favourable conditions are reversed.
For a fund that is closed to all new business,
a different approach is needed and it would normally be appropriate
to enhance asset shares immediately, to ensure that all current
policyholders get a fair share of the distribution of the estate,
in a manner which allows this enhancement to be reversed in adverse
3.8 The role and responsibilities of the Policyholder
Theframework for negotiation between the Policyholder
Advocate and the life assurance companies.
As a mutual insurer we would not wish to comment
on these points.
3.9 The role of the with-profits committees
of life assurance companies
We support the role and purpose of with profits
committees as currently defined by FSA rules and the current arrangements
for establishing them and operating them, including the ability
to establish alternative governance arrangements to fulfil the
aims set out by the FSA.
3.10 The approach of the Financial Services
Authority to the issue of inherited estate.
We believe that the FSA's approach is broadly
appropriate, but that there is scope for a greater recognition
of the factors that distinguish mutual insurers from proprietary
companies, particularly relating to the need to protect the inherited
estate as the firm's primary source of capital, for use by future
generations of policyholders and as a source of capital for growth.