Insurers face life in price spotlight

Disclosure rules turn up the heat

Since the beginning of the year, life insurance companies have had to start to disclose to their customers exactly how much the product they are buying costs them and exactly how much the person that is selling the product is earning from the sale .

Many people buying an endowment policy to cover an average £50,000 mortgage may be horrified to find out that the adviser, bank or building society offering the policy to them stands to earn £800 from the sale. The average member of the public may be equally amazed to find out nearly a third of their pension contributions for instance go towards paying the company's expenses, including commission, fund management and administration charges.

A survey of some the biggest providers of endowment policies carried out by the Independent on Sunday reveals that the most expensive companies like Royal Life, Standard Life and Guardian eat up around 30 per cent of their policyholders' money in expenses while Leeds Life owned by the Leeds Permanent Building Society only uses up 19 per cent of their policyholders' money to pay its expenses.

As the new disclosure regime begins to settle down, many people will start to use the new expenses and commission figures to shop around, which will bring in true price competition for the first time. It is likely that companies that are unable to cut back their costs will not do any business and will be taken over. It could also lead to more advisers giving their commission back to the investor.

However, it is very important that consumers do not use costs alone to judge whether they should take out a policy with a particular company. The most important factor when choosing an investment , whether it be personal pension, life insurance policy oran endowment ,is the investment performance of the particular company. For instance, despite its relatively high costs, Standard Life produced some of the highest returns for investors over past years. Guardian on the other hand has both poor performance and high costs.

Anyone who wishes to buy an investment product will be given a bewildering array of figures before they sign up for the contract. As well as the commission the salesman or his organisation can expect to earn, they will be told how much is taken out of their premiums in the first years of the policies and how these costs will mount up in the later years. They will also be told how much these expenses would have been worth if they had been invested and how much the annual returns are reduced by the company's costs. For the first time they will also be told what they can hope to get back if they cash their policies in early.

They will also be given an idea of what impact the expenses will have on the percentage return they may get on their policies.

The new rules have already begun to have strong impact on the market. Many companies have completely redesigned their product ranges in order to make their costs look better. Many companies such as Norwich Union and TSB, have switched their salesforces from commission-based pay to salaries.

Nationwide Building Society is also planning to pay its salesforce salaries when it launches Nationwide Life this year. Other companies have moved away from paying advisers up front commission in anticipation of commission to be earned on future premiums, towards paying level commission over the term of the policy.

Some companies, like Standard Life and Scottish Mutual, have also improved the amount of money that investors will get back if they cancel their products early.