The ABI is looking to cap the amount product providers can charge for factors such as mortality and ...
The ABI is looking to cap the amount product providers can charge for factors such as mortality and morbidity on unit-linked protection policies.
Actuaries have discretion over the charges they make on unit-linked protection policies to cover the amount of policy claims they expect due to death and illness.
Assumptions of the level of claims are based on the actuaries use of mortality and morbidity data, which measures the susceptibility of people to illness. This is now to be capped at 120% of the claims they expect.
The move is part of ABI's Savings and Long Term Risk (SALTR) project, which aims to raise industry standards.
Mortality and morbidity charges on unit-linked protection policies are made by cancelling the units invested. This is similar to reduced allocation rates used in pension products.
The proposed cap is being put together to reduce the potential that life offices have for passing charges on to policyholders and disguising this as covering themselves for assumptions about mortality and morbidity claims. For example, it aims to prevent a situation where a life office expects £100 worth of claims but charges £200 to unit-linked policyholders. Under the proposals, the charge made would be restricted to £120.
The proposals, if they receive approval after an industry-wide consultation, would affect unit-linked policies including whole of life plans, long term care, critical illness, income protection and term assurance. The move aims to make the charging structure on unit-linked protection policies more transparent.
Nick Kirwan, product development manager at Scottish Mutual Pegasus, believes there may not be enough good data on susceptibility to illness to justify extending the limits to morbidity.
He said that more leeway than 120% may be needed for morbidity factors as the figures on which actuarial assumptions are based for morbidity is less complete than for mortality, where there is much more claims experience. The logical conclusion of the proposal could be providers pulling out of markets such as income protection and critical illness.
Under the SALTR proposals, brands can only receive accreditation if all products meet its standards. Kirwan said this could lead providers to believe the 120% limit for morbidity charges could expose them to too much risk and they may choose to pull out of the market to retain a SALTR accreditation on the rest of their product range.
Ron Wheatcroft, technical manager at Swiss Re Life & Health, said that those offering unit-linked protection products may look to revamp their product structures and move to traditional with-profits protection products to avoid the SALTR mortality and morbidity charge restrictions.
