Making Your Choice

Why the reattribution is happening

1. All insurance companies need to hold significant amounts of capital.

2. With-profits insurance is particularly capital hungry because it offers some guaranteed policy benefits, which are paid irrespective of how well investment markets perform.

3. Because market conditions may well result in policyholders being guaranteed higher benefits than their premiums actually earn, the companies need to hold money in reserve (a ‘capital buffer’) to enable them to meet those guarantees even in times of poor investment performance.

4. Like many other insurance companies, Aviva has accumulated a ‘capital buffer’ as a result of many years of what it saw at the time to be careful management decisions about how much bonus it could afford to pay to policyholders.

5. Capital accumulated in this way is known as an inherited estate. Before the widespread use of computers, companies took decisions that, with the benefit of hindsight, were probably overly careful.

6. However, recent market conditions show how difficult it is to judge how much capital should be kept.

7. When it is clear that there is more capital in the estate than is needed extra bonuses, known as special distributions, may be added to policies, increasing their value. These special distributions from the estate are paid 90 per cent to policyholders and 10 per cent to shareholders.

8. In a reattribution the company offers to pay current policyholders for their rights to all such future special distributions. Consequently any special distributions that would have been made to those policyholders who accept the offer, will go instead to shareholders.

9. A company does not have to make a reattribution offer, and if it does not policyholders and shareholders would continue to receive any special distributions that are made in the normal 90:10 shares.

10. Policyholders do not have to accept any reattribution offer that is made. If they do not, their policies will go into a special fund with its own share of the inherited estate. Policyholders who do not accept the offer will continue to receive their normal 90 per cent of any special distributions from that fund and shareholders will continue to receive their normal 10 per cent of those special distributions.

11. The reattribution allows the company to gain access to capital that it would not otherwise be able to get. The reattribution needs to represent a sufficiently good deal for Aviva or it would not propose it.

12. In this reattribution the policyholder advocate believes that the offer is in the interests of policyholders. She does so because she estimates that possible special distributions, under the current FSA rules, is around £100 million, whereas policyholders are being offered £500 million.

The recent special distribution for qualifying policyholders

At the end of 2007 the company changed its investment strategy, in part as a result of the reattribution discussions with the policyholder advocate and the FSA, so that risk was reduced and less capital was needed to be held in the estate to support the fund.

A special distribution with an estimated value of £2.3 billion as at 1 January 2008 was announced in February 2008 of which £2.1 billion2 is being paid over three years to qualifying policyholders. Those whose policies were in force on 1 January 2008, 2009 and will be in force on 1 January 2010 will receive all three payments.