View from City Road: Pru's proposals fail to excite

Last November, Mick Newmarch, chief executive of Prudential Corporation, suggested the life insurance industry should resolve the long-running dispute over its sales practices through a dialogue with the Office of Fair Trading. Hence yesterday's open letter to the OFT setting out the Pru's approach to telling customers what they are buying.

It is not obvious that it has been worth the wait. Mr Newmarch draws a number of distinctions, but it is far from clear that Prudential's preferred method of disclosure would be any better at preventing thousands of life insurance policies being taken out and cancelled before buyers receive value for their premiums.

The OFT is keen to give much more information about the financial penalties investors face on early cancellation. Mr Newmarch argues that, rather than give hypothetical illustrations of cash proceeds, it would be better to ensure that 'the saver is put in possession, pre-sale and in frank and unambiguous terms, of the material facts about the contractual arrangements which will apply'.

These key contract terms would cover premiums and penalties imposed for stopping payments, the build-up of policy proceeds, ancillary features such as mortality cover and fund management and administration charges.

Mr Newmarch makes the valid point that buyers of life insurance rarely shop around. They will therefore make little use of comparative expense and performance data to select a contract. Publication of these details would stimulate improvement from companies least able to bear scrutiny.

In contrast, Mr Newmarch claims the Pru's approach would give a more general impetus to improved standards through self-assessment and peer pressure.

The trouble is that many in the life insurance industry would already claim to be setting out the terms of their policies. Some deluded fools might even believe they are doing so frankly and unambiguously. Life companies argue that they sell long- term contracts. Those who leave early must expect to lose out.

If policyholders did understand the issues in this clear way, there would be no problem. But, even if a contract is set out clearly, many fail to imagine the impact of divorce, redundancy or serious illness until it happens.

The OFT intends to respond to the Pru with an open letter of its own. The Pru, meanwhile, is to produce more detailed proposals. It will need to work hard to convince.