Zeev's Turnips Patch-No Politics (ZEEV)

[XBrit]

Here's the scariest article I have read this weekend. Draconian Argentina-style penalties on redemptions from equity products, to prevent the UK insurance industry from collapsing.

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Daily Telegraph (U.K.), 21 July 2002

Exit Penalties to Stop Stampede
By Emma Simon and Grant Ringshaw

Emergency measures to prevent panic selling by private investors of life policies, pensions and other equity-related products have been imposed by leading financial services groups.

They are levying swingeing penalties on consumers who want to cash in their savings plans. In some cases, the penalties are now higher than the stiff charges imposed by Equitable Life, the stricken life insurer which closed to new business in December 2000.

In an unprecedented move, Norwich Union Life - part of Aviva, the UK's largest insurance group - last week pushed up penalties on early redemptions twice. The penalties - known as a market value adjuster (MVA) - are imposed when policyholders try to cash in policies before they mature.

Norwich Union customers now face losing an average of 12 per cent of their investment if they cash in pensions, endowments or with-profits bonds. This figure is almost double the average penalty of 6.5 per cent levied a week earlier.

Meanwhile, Legal & General has introduced a tougher penalty, lifting its MVA on pensions to 22 per cent from 19 per cent earlier this month.

The moves, affecting hundreds of thousands of savers, show the industry's grave concerns that the turmoil in world stock markets could induce mass selling among private investors. Last week the FTSE 100 index dropped 3 per cent to 4,098.3, but in wild gyrations it temporarily fell below 4,000.

Yesterday saw a fresh attempt by President Bush to restore investors' confidence in global stock markets. He called on Congress to rush through legislation introducing tougher penalties on fraudsters. "We will not accept anything less than complete honesty," he said.

Meanwhile, Norwich Union defended its decision to impose tough charges. "You have to see this in the context of what have been pretty significant gyrations in the stock market," said Philip Scott, the chief executive of Norwich Union Life. L&G said: "We are experiencing extreme markets which need significant measures."

In the past month major life insurers including Friends Provident and Scottish Widows have all imposed heavy extra exit penalties. The Financial Services Authority, the City watchdog, said the penalties were matters for individual companies, but added that it could step in if it felt the penalties were unfair to different sets of policyholders.

Last week, leading financial advisers - including Chelsea Financial Services - reported a marked rise in redemptions of equity funds as investors started to lose confidence in a stock market recovery.

There are renewed concerns about the financial health of life insurance funds. According to research by Fox-Pitt Kelton, the securities house, a fall in the FTSE 100 to 4,000 would wipe out all life fund surpluses at Aviva and the life businesses of Abbey National.

If the FTSE 100 fell to 3,500, several large insurers would be forced to raise billions in new capital.


http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/07/21/cnpen21.xml&sSheet=/money/2002....