The jargon explained

Actuaries
Annual Bonus
Actuarial function holder
Assets
Asset Share
Aviva plc
Bond
Bonus
CGNU Life
Closed fund
Conduct of Business Rules
CULAC
Distribution
Election
Eligible with-profits policyholders
Financial Incentive
FSA
FSMA
Fund
Fund transfer
Guarantee
High Court
Inherited Estate
Independent expert
Liabilities
Market Value Reduction (MVR)
Maturity payment
Mortgage endowment promise

90:10 fund
Non-profit policies
Norwich Union Life
NUIL
NUL (RBS)
NULAP
Occupational Pension Scheme
Orphan assets
Part 7 transfer
Policyholder
Policyholder Advocate
Policyholder incentive payment
PPFM
PRE
Premium
Reattribution
Reversionary bonus
Reinsurance
Smoothing
Stakeholder pensions
Sum assured
Surrender value
Terminal bonus
TCF
Whistleblowing
With-profits bond
With-profits funds
With-profits policies
With-profits review

Actuaries

Actuaries provide commercial, financial and prudential advice on the management of assets and liabilities of insurance companies, especially where long term management and planning are critical factors. The Institute of Actuaries in England and Wales and the Faculty of Actuaries in Scotland are the two chartered professional bodies for UK actuaries, working closely together across the UK as "The Actuarial Profession".

Annual bonus

This is also known as a reversionary bonus. It is an amount added to the sum assured of a with-profits policy and must be declared out of the surplus profits of the insurance company. Once declared the value of the bonus is guaranteed. The bonus is payable at the end of the term of the policy or on the prior death of the life assured. (It is not to be confused with ‘terminal’ bonus.)

Actuarial function holder

at the end of 2004, the role of the Appointed Actuary within life insurance companies was scrapped and the role was split into two new functions, the actuarial function holder and the with-profits actuary. The actuarial function holder is responsible for advising senior management and directors of life companies on the valuation of policyholder liabilities and wider issues. The actuarial function holder is an employee of the company and may be a member of the governing bodies he advises.

The with-profits actuary advises senior management and directors of companies on exercising management discretion in the running of the company’s business. The with-profits actuary may be an employee of the company but is not allowed to be a member of the governing bodies he advises.

The actuarial function holder and the with-profits actuary both have ‘whistleblowing’ responsibilities to the FSA.

Assets

these are the investments made by a life insurance company, such as shares, property, corporate and government bonds that earn income for policyholders and which are also held by insurance companies to meet their liabilities.

Asset share

this is an indicative valuation by an insurance company of the value of an individual's policy. It is made up of the sum of premiums paid by the policyholder together with the proportion of the policy’s share of the investment return allocated by the insurance company to the assets in the with-profits fund minus expenses, the cost of guarantees, tax and other charges. An insurance company will usually aim to pay out policy claims at or around 100 per cent of asset share.

Aviva plc

Aviva plc is the world's fifth-largest insurance group, based on gross worldwide premiums for the year ended 31 December 2005, and the biggest in the UK. It is one of the leading providers of life and pensions products to Europe and has substantial businesses elsewhere around the world. Norwich Union is one of its UK subsidiaries.

Bond

a bond is like a loan. It is issued by companies or governments to individual investors to raise money and provides investors with fixed interest payments for a period of more than one year.

Bonus

the profits earned by the fund are paid to policyholders in the form of a bonus. There are two types: an annual or reversionary bonus which is usually allocated each year and a terminal bonus which is paid when the policy matures or on the prior death of the life assured.

CGNU Life

CGNU Life Assurance Limited is an insurance company that is part of the Norwich Union Life group of companies. It was known previously as both CGU Life Assurance Limited, General Accident Life Assurance Limited and Yorkshire General Life Assurance Limited.

Closed fund

a closed fund is one which is no longer actively writing new policies although it continues to operate for the benefit of existing policyholders. The subject is one which has been of great interest in recent years and has been addressed often by the FSA. See, for example the following link http://www.fsa.gov.uk/Pages/Library/Communication/Speeches/2004/SP197.shtml

Conduct of Business Rules

written by the FSA, they govern the marketing and selling of financial products, before, during and after the sale of an insurance policy.

CULAC

Commercial Union Life Assurance Company Limited is an insurance company that is part of the Norwich Union Life group of companies.

Distribution

a distribution is a payout from the inherited estate to policyholders (90 per cent) and shareholders (10 per cent) and may come about in a number of ways. The company may elect to make a distribution. Alternatively, the FSA rules can require a distribution when, for example, the company has more assets than it needs to support its with-profits business or when no new with-profits business is being written from the with-profits fund. A distribution is made in the form of bonuses allocated to policies and must be made out of surplus profits of the company. If a distribution happens the remaining assets of the inherited estate continue to support smoothing and investment flexibility.

Election

the technical term given to the process where eligible policyholders vote on whether or not they want to be part of the reattribution and receive a policyholder incentive payment.

Eligible with-profits policyholders

policyholders who are entitled to participate in the reattribution and receive a policyholder incentive payment. These are policyholders who are invested in the with-profits funds of CGNU Life and CULAC (Commercial Union Life Assurance Company). This would include NUL(RBS) and NUIL policies. Stakeholder pension policies are not eligible. There is a facility on Norwich Union’s website where you can see whether your policy is potentially eligible https://www.life.norwich-union.com/fundtransfer/announce/amIEligiblePage.do.

Financial incentive

also known as a policyholder incentive payment, this is the payment that will be offered to eligible with-profits policyholders in return for giving up any right they might have to a possible future distribution from the inherited estate. The payment is likely to be made in cash by a transfer into the bank account of the policyholder, but in some cases it might be necessary instead to provide an additional bonus to the policy.

FSA

The Financial Services Authority or the FSA is an independent body that regulates the financial services industry. If you would like to find out more about the FSA you can do so by visiting its website, www.fsa.gov.uk

FSMA

The Financial Services and Markets Act 2000. This is the legislation which sets out the powers and responsibilities of the FSA.

Fund

This is the pool of assets held by an insurance company. Policyholders invest in them through the premiums they pay.

Fund transfer

The legal mechanism for transferring an insurance fund from one company to another is also known as a Part 7 transfer (which refers to Part 7 of FSMA). Fund transfers require the approval of the High Court.

Guarantee

this places a contractual obligation on an insurance company to calculate a policyholder's maturity payout using a pre-agreed formula set out in the policy terms.

High Court

this is a civil court which has the authority to hear any civil case in England and Wales. It is based at the Royal Courts of Justice on the Strand, London and has jurisdiction for hearings relating to Part 7 transfers.

Inherited Estate

the inherited estate – often described by the media as orphan assets - is the expression used to describe surplus assets in a with-profits fund (in other words, assets not required to meet the liabilities of the fund). An inherited estate will often build up over many years. Whilst an inherited estate, like other assets allocated to a with-profits fund, is owned by the company, it cannot be used entirely freely by the company but is used for a variety of things including:

to provide investment flexibility (for investment in shares, which offer higher returns than some other investments, but are also higher risk);
to smooth bonuses;
to provide extra security against unexpected calls on reserves;
to support the sale of new business;
to pay shareholder tax;
to pay for the costs of mis-selling;
to make strategic investments.

Independent expert

the person nominated or approved by the FSA to make an objective assessment of the firm’s reattribution proposals. Norwich Union has appointed Mr Nick Dumbreck, currently the President of the Institute of Actuaries, as the independent expert for its reattribution proposals. He will ensure that the proposals do not weaken the security that policyholders have at present or change their benefit expectations. Mr Dumbreck will prepare a report outlining his opinions, a summary of which will be made available to policyholders.

Liabilities

these are the amounts that the insurance company expects to need to meet present and future commitments to policyholders.

Market Value Reduction (MVR)

market value reduction. If policies are cancelled by policyholders before the date the policy should have finished, the amount paid back to the policyholder might be reduced to protect the fund and to reflect the costs involved in setting up the policy when it was first taken out.

Maturity payment

the amount paid out to the policyholder when his or her policy has come to an end, including any reversionary bonuses and terminal bonus.

Mortgage endowment promise

this is a promise made by CGNU Life to its with-profit mortgage endowment policyholders that it would pay any shortfall on maturity between the claim value and the mortgage originally targeted, provided investment earnings on CGNU Life’s with-profits fund average six per cent a year net.

90:10 fund

these are funds where, when there is a distribution, the amount paid out is 90 per cent to policyholders and 10 per cent to shareholders.

Non-profit policies

insurance policies where the sum assured is fixed and known to the policyholder.

Norwich Union Life

the life insurance division within the Aviva plc group of companies.

NUIL

Norwich Union International Limited is an insurance company which is part of the Norwich Union Life group of companies. With-profits policies written by NUIL are reinsured into the with-profits funds of CGNU Life and CULAC.

NUL (RBS)

Norwich Union Life (RBS) Ltd is an insurance company which is part of the Norwich Union Life group of companies. It was known previously as General Accident Managed Pension Funds Limited and Provident Mutual Managed Pension Funds Limited. It re-insures its with-profits investments into the CGNU Life and CULAC with profits funds.

NULAP

Norwich Union Life & Pensions Limited is an insurance company which is part of the Norwich Union Life group of companies.

Occupational Pension Scheme

this is a private pension scheme run by some employers and set up under a trust arrangement. The pension policy is owned by the trustees of the scheme and the proceeds are used to provide pension payments to those who are members of the scheme.

Orphan Assets

This term is often wrongly used, especially in the media, to describe the "inherited estate". In fact orphan assets are unclaimed assets due to policyholders who for some reason cannot be traced (for example, they have moved or they have died). Orphan assets play no part in this reattribution.

Part 7 transfer

see Fund transfer.

Policyholder

The policyholder is the legal owner of an insurance policy. This can be an individual or the trustees of a pension scheme.

Policyholder Advocate

this is a new role introduced by the FSA. The Policyholder Advocate is an individual nominated or approved by the FSA who is appointed to protect the interests of policyholders in negotiations with the company proposing a reattribution.

Policyholder incentive payment

see definition of financial incentive.

PPFM

With-profits insurance companies are required by the FSA to produce Principles and Practices of Financial Management which is a document that describes in detail the way in which the company's with-profits fund is operated. A Consumer Friendly version – known as a CFPPFM – is also produced.

PRE

The concept of Policyholders' Reasonable Expectations has now been replaced by TCF. PRE required insurance companies to consider any reasonable expectations that policyholders may have as to how they would be treated by the insurance company. Such expectations could be formed and influenced through, for example, policy terms, promotional and publicity material, the past practice of the company and practice within the life assurance industry generally.

Premium

a payment made by a policyholder to an insurance company to be invested on behalf of the policyholder. Some policies are single premium, where one payment is made at the start of the policy and others are regular premium policies, where payments are usually made each month.

Principles for Businesses

these are the fundamental overriding obligations of all firms regulated by the FSA. The principles are set out in the FSA Handbook of Rules and Guidance as follows:

Principle 1 Integrity. A firm must conduct its business with integrity.

Principle 2 Skill, care and diligence. A firm must conduct its business with due skill, care and diligence.

Principle 3 Management and control. A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

Principle 4 Financial prudence. A firm must maintain adequate financial resources.

Principle 5 Market conduct. A firm must observe proper standards of market conduct.

Principle 6 Customers’ interests. A firm must pay due regard to the interests of its customers and treat them fairly.

Principle 7 Communications with customers. A firm must pay due regard to the information needs of its customers, and communicate information to them in a way which is clear, fair and not misleading.

Principle 8 Conflicts of interest. A firm must manage conflicts of interest fairly, both between itself and its customers, and between one customer and another.

Principle 9 Customers: relationships of trust. A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.

Principle 10 Customers' assets. A firm must arrange adequate protection for customers' assets when it is responsible for them.

Principle 11 Relations with regulators. A firm must deal with its regulators in an open and cooperative way, and must tell the FSA promptly anything relating to the firm of which the FSA would reasonably expect prompt notice.

In October 1999, Howard Davies, the then Chairman of the FSA, described the Principles for Businesses as follows:

"The Principles for Businesses will stand at the pinnacle of the new FSA Handbook of Rules and Guidance. They will be a key element in building a regulatory system in which requirements are clear, which can operate with judgement and flexibility, and which can cope with innovation in products and services."

Reattribution

the process whereby the company offers to buy out the rights or expectations of policyholders in relation to a possible future distribution of the inherited estate. Policyholders are given a policyholder incentive payment if they choose to give up their right to participate in any future distributions from the inherited estate. The position of policyholders who choose not to accept the offer remains unchanged. Following the reattribution, the inherited estate which is attributable to policyholders voting in favour of the reattribution remains available to support smoothing and investment flexibility, but the estate becomes owned 100 per cent by shareholders. If any part of the reattributed estate is no longer required to support the business, it may be released to the shareholders.

Reversionary bonus

see Annual bonus.

Reinsurance

a means by which an insurance company can reduce the risk of losses from its with-profits business. The reinsurer agrees with the insurance company that it will pay a certain amount of any claim made by a policyholder of the insurance company, subject to certain agreed limits.

Smoothing

this is the process by which insurance companies hold back some investment returns in good years, so that bonuses in poorer years can be topped up.

Stakeholder pensions

a type of low-charge pension. Introduced in the UK by the government in 2001 to encourage long term savings in relation to retirement, stakeholder pensions must satisfy a number of minimum government standards to ensure that they offer value for money and flexibility.

Sum assured

the sum assured is a guaranteed minimum amount that is paid when the policy matures.

Surrender value

The valuation given to a policy if the policyholder decides to surrender (or give up) the policy before it has been held for a certain number of years, usually specified when the policy is started. See market value reduction

Terminal bonus

this is a bonus paid to policyholders in the year in which their policy matures. It is a means by which insurance companies seek to ensure that each with-profits policyholder receives a due share of the investment returns achieved by the company.

TCF

Treating Customers Fairly is encapsulated by Principle 6 of the FSA's Principles for Businesses, which requires an insurance company to pay due regard to the interests of its customers and treat them fairly. TCF is central to the FSA's aim to move towards principle-based (and not rule-based) regulation. It aims to improve, for example, the provision of simple, understandable information to consumers. Breach of Principle 6 by an insurance company is only enforceable by the FSA, it is not enforceable by policyholders.

Whistleblowing

this is an obligation on the with-profits actuary and the actuarial function holder to report certain matters to the FSA. This would be the case, for example, if a firm is not meeting liabilities to policyholders or where a firm may not have, or continue to have, sufficient financial resources and the firm does not follow the advice of the with-profits actuary or the actuarial function holder to take appropriate action to remedy this.

With-profits bond (sometimes called a ‘single premium’ bond)

this is a whole of life insurance policy which is paid for by a single premium.

With-profits funds

With-profit funds are investment vehicles designed to provide savers with access to stock market investment at lower risk. The products that use With-profits are typically regular and single premium savings plans (endowments and bonds) and pensions. With-profits funds pool policyholders’ investments; customers share in the company’s investment returns and other profits. These returns are smoothed to avoid the volatility associated with direct investment in shares.

With-profits policies

these are long-term investments provided by insurance companies. Policyholders pay premiums, either on a regular basis or as single payments , which are put into a pooled fund. The funds are invested by the insurance company. If the investments perform well, bonuses are added to the policy. Often some of the investment return is kept back in good years, so that bonuses in poorer years can be topped. This is known as smoothing.

With-profits review

the FSA launched a review of the with-profits industry in spring 2001. It was completed in 2005 and resulted in a series of changes to the FSA Handbook. The FSA with-profits review was divided into two stages. The first consisted of 5 issues papers which asked for comments from interested parties on the process for dealing with the reattribution of inherited estates; Regulatory Reporting; Disclosure to customers; Discretion and fairness in with–profits policies; and Governance in with-profits funds and the future role of the appointed actuary.

The conclusions of this part of the review were outlined in the Feedback Statement published in 2002. This stated that there needed to be:

1. Strengthened governance
- with more transparency over discretion retained by insurers and increased transparency over the way in which this discretion could be exercised.
- with improvements to the way that interest of policyholders are accounted for in the management of with-profits funds; and
- with clearer mechanisms to demonstrate that in exercising discretion, directors have balanced competing interests and fulfilled the firm’s obligations to treat customers fairly.
2. Transparency
- with improved availability of and access to information on the financial condition of firms and their with-profits funds for the users of regulatory returns (i.e. more transparency for the regulator and advisors)
- with improved disclosure of information to customers and intermediaries on with profits funds both at the point of sale and afterwards
3. Reattribution of inherited estates
- with more transparency in this process
- with the role of a Policyholder Advocate developed with a duty to consult. This was recognition of the fact that a reattribution is a commercial negotiation.

The second stage considered these factors in more detail and led to changes to the FSA Handbook, which provides the rules and guidance for firms. The key results of this consultation were as follows:

1. Introduction of the PPFM
2. Introduction of general guidance about the way in which with-profits funds are run which includes rules on the distribution of inherited estates
3. Changes to Regulatory Reporting
4. Changes to the role of actuaries
5. The clarification of the ultimate responsibility for the running of the with-profits funds being that of the senior management of the fund, and not of the actuaries advising it
6. Introduction of a Policyholder Advocate and guidance on the process of a reattribution.