Mutuals score best against the rest

Norwich Union is among a large number of mutual life insurers serving their policyholders better than competitors set up as conventional companies owned by outside shareholders.

An analysis exclusively for The Independent by John Chapman, a former senior official at the Office of Fair Trading, shows that at the top of performance league tables, mutuals outnumber proprietary companies by a wide margin. They also represent a minority of insurers at the bottom.

The excellent performance of mutuals raises fundamental questions about whose interests are being served by the trend towards abandoning this long-established form of ownership.

As a mutual society, owned by its members, Norwich Union has given its policyholders among the best returns in the industry. Some of the best- known names among the conventional companies, such as Royal Insurance and the Pru, are among the worst performers for their policyholders.

There are difficulties in using raw data on cash payouts from policies to compare performance because they do not show how much a company pays for early or mid-term surrender - 70 per cent of policyholders cash in before maturity.

Mr Chapman, who retired this year from the OFT after writing several reports on the life industry, has developed a sophisticated analysis that allows for this. He has ranked 15 products including 25-year mortgage repayment policies, regular premium and single premium pensions and unit- linked investments.

Mr Chapman's results confirm that mutual insurers are far more likely than proprietary companies to be top-rank performers, and much less likely to be near the bottom.

He said: "This shows the strength of the mutuals. After all, they ought to outperform the proprietary companies. They do not have to give away 10 per cent of their earnings in transfers to shareholders."

Three of the top four in Mr Chapman's rankings - Equitable Life, Norwich Union and Standard Life - are mutuals. Six of the top 10 are also mutuals, and a further company, Scottish Mutual, was mutual until four years ago.

At the other end of the scale, four of the bottom five are proprietary companies and they are among the biggest names - Royal, Sun Life, the Pru and Britannia Life.

Mr Chapman ranks companies' projections of future returns to policyholders for each type of product. This is done by marking them on a scale based on the returns they produce when cashed in early, at a midway stage and at maturity. He makes a similar assessment of past performance.

Combining these two ratings reveals which companies can back their projections of above average-future returns by pointing to above-average past performance.

He also ranks products using only the companies' projections of future returns. These reflect their ambitions, but often are not supported by past performance. The end result is, however, very similar: four of the top five are mutuals and four of the bottom five are proprietary.

Mr Chapman's mutual versus proprietary company rankings start with company data prepared by the magazine Money Marketing, which has adopted his analytical methods.

The primary determinant of policyholder returns, whatever stage up to maturity they cash in their policies, is the total amount of charges levied by the insurers on their customers over the years.

Investment performance is also important. But the charges reduce the overall yield by varying amounts, from 1 per cent a year to 5 per cent a year at maturity and for those cashed in early the reduction can be 10 per cent a year or more.

It takes a truly miraculous investment performance to overcome the handicap of higher charges over a period of years.

The projections published by the insurers of how much their policies are worth at various stages up to maturity give the best measure of charges.

Financial regulators insist these are based on standardised estimates of investment returns.Therefore the differences in the projections reflect variations in companies' charges.

Mr Chapman combines projected future performance with actual past performance, thus ranking them (in the first column of each table, above) by the number of products above average on both scores. If companies promising good returns have done well in the past, this gives credibility to their projections.

The second column is based on companies' future projections alone, but it still confirms the success of the mutuals.

The process has been repeated with companies that score worse than average, to give a similar ranking at the opposite end of the scale.