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The Actuary The magazine of the Institute & Faculty of Actuaries
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Penrose report

I found this report most instructive and would like to comment on policyholders’ reasonable expectations (PRE). As I am not a lawyer my understanding is subject to correction.

Lord Penrose shows at great length that there is no definition of PRE, even though the expression was first introduced in the Insurance Amendment Act 1973. By this I think he means in a legal sense. Actuaries would say that PRE are payment of the underlying assets. As he shows, claims payouts often included terminal bonus and thereby were well in excess of the underlying assets.

Regarding PRE, Lord Penrose discusses the bonus notices in particular. Presumably these are regarded as part of the contract. Even if bonus notices are not mentioned in the policy representations, the issuing of bonus notices is customary. The point with Equitable is that bonus notices tend to include terminal bonuses. This raises the question as to whether this means that PRE is the inflated amount inclusive of the terminal bonuses.

The lawyers seem to have been divided on the differential terminal bonuses for policies with or without GAR. Several of them advised that Equitable would win the House of Lords case. Actually Equitable lost this case. Some reports have said that the House of Lords were eccentric in not allowing GAR terminal bonuses to be reduced, and also disallowing ring-fencing of GAR funds. Presumably their Lordships’ thinking was based on the bonus notices. These had shown the full terminal bonus and in their opinion this precluded the differential bonus system. I think Penrose could have explained why the lawyers differed and said more about the Lords case and, especially, given a fuller account of the judgment.

It seems that Equitable had an exaggerated idea of their latitude with regard to bonus distributions. For instance, applying MVA only if the motive for transfer was to take advantage where asset values are low. I do not think that contract law permits such discretion.

There is one issue that does not seem to have been considered. Suppose that there had been a ‘run on the bank’. Say all with-profits policyholders transfer over four weeks. In the first week it may be that benefits would be paid including terminal bonus. In the second week Equitable would realise the extent of transfers. It could then exclude terminal bonuses. However, the second-week transferors could complain that their terms are inferior to those in the first week given that the underlying assets are insufficient to pay out the bonus of first-week transfers. It is not clear how the matter would have been resolved.