It’s natural to hate insurers. If we don’t need to call on them, it annoys us that they get to keep our premiums anyway. And if we do need them, we never think they pay out quite enough. But these days there’s an extra reason to loath the industry.
Firstly, it’s begun withholding the insurance that, we’re starting to realise, we need more than any other: insurance against unemployment. Not only have premiums demanded for unemployment insurance risen by 17% over the last year, says The Daily Telegraph, but some insurers are pulling products altogether. Norwich Union has pulled some of its best-sellers, fearing recession will “leave it inundated with claims”. Other insurers look likely to follow suit. Expect a “dramatic reduction in choice”, says Louise Cummings of Moneysupermarket.com, and higher premiums too. Not exactly good news for bankers is it?
There’s bad news too for anyone who has investments with an insurer in the form of a with-profits policy. You’re supposed to be able to cash in these equity-based savings schemes at any time. But right now it isn’t convenient for the insurers for you to do so (they need the money). So they’ve introduced what they call market value reductions (MVRs). These are effectively whopping great exit penalties, in that they immediately reduce the value of your investment by whatever percentage the insurer decides suits them, and for as long as they think it might suit them (it was around four years last time round). So last week, the value of some Norwich Union policies was instantly cut by 22%, and the average of all the MVRs imposed was around 15%.
According to Geoff Penrice of Bates Investment Services, this makes sense. Why? Because with-profits funds use a “smoothing process” to make sure their payouts are fair: “In good-performing years they hold back some growth, and in poor years they use their reserves to continue paying bonuses.” Does that make sense to you, given this year presumably counts as a “poor year”? No. Nor me. “I feel like I have been punished for being prudent,” one miserable saver told The Daily Telegraph. But he’s wrong. He is actually being punished for buying an over-complicated and untransparent product. Financial advisers and financial-product producers love these for the reason that they can leech charges out of their holders at every turn (note that all with-profits investments allow for the imposition of MVRs in their small print).
The rest of us should learn from the last few weeks that when it comes to money, the simpler the product the better. And hope that we don’t lose our jobs and, what with having no insurance, find ourselves forced to cash in policies while the MVRs remain in force.