How the rating system works

The basis of John Chapman's rating system is the fact that charges rather than investment performance are the primary determinant of policyholder returns when buying a pension, mortgage or savings policy from a life insurance company.

Investment results are important, of course. However, the arithmetic of charges puts it into perspective. The charges reduce the overall yield of a policy by the equivalent of between 1 and 5 percentage points a year. For those cashed in early, the reduction in yield can be 10 per cent a year or more.

A simple analysis of a company's final performance - the cash delivered when a policy matures - is not the best way of measuring how good it is. As few as 30 per cent of investors may hold a policy to maturity, and it is vital to know what they will be paid should they pull out early.

Mr Chapman's rating system takes this into account, by rating companies on how much they pay back investors, or give in pension transfer value, in the early stages of a policy, part way through it and at maturity.

First, the system rates a company's past performance, based on the amount paid at the three stages. The same calculations are done again, based on the company's own projections of future payouts.

Since charges are the dominant factor, the projections assume that every company has the same investment performance. Variations in the results are therefore a short cut to showing the differences in charges at each stage. These sums are in the first three columns of the main mortgage table (facing page).

But Mr Chapman does not rely on a confusing array of numbers. Instead, he allocates a letter from A+, the best, down to C-, the worst. A company with an A+A+A+ rating is excellent at every stage. A rating of CAA or CCA means a policyholder will be treated badly on early surrender but well if the policy is kept to maturity. The letters are allocated by calculating how far a company deviates up or down from the midpoint of all the companies in the category.

The top handful of companies in the main and summary tables are those where good future projections are matched by past performance. In the rest of each table, the rankings are based on companies' projections of future charges alone.

John Chapman's pioneering methods for comparing performance between companies have been adopted by Money Marketing, the magazine for independent financial intermediaries, which asked KPMG to carry out detailed calculations for each company. Mr Chapman's analysis for The Independent uses these calculations.

Fuller performance tables for unit-linked and with-profits policies are available from Money Marketing Customer Services, St Giles House, 50 Poland Street, London W1V 4AX, for pounds 3.75 each inc p&p.