With-profits Policy - Perceived Risk and Actual Risk

Perceived Risk and Actual Risk

For many years with-profits policies were seen as a safe alternative to deposit accounts for many investors (especially elderly investors). Years of steady reliable returns in combination with unscrupulous sales tactics from insurers fostered the impression that a 'low-risk' investor should invest in with-profits. This perceived low risk belied the reality of the underlying investment strategies of many insurers who used high equity exposure and high-risk financial instruments to achieve the returns.

In the middle of the bear market of the early 2000s the UK regulator (the Financial Services Authority) imposed a new regulatory regime for with-profit providers, in response to growing consumer complaints following the introduction of market value reductions. The realistic reporting regime had the combined effect of requiring the insurers to move more of their funds into lower-risk investments (corporate bonds, and gilts) to cover liabilities; and to lower projection rates in line with the new asset mix of the fund to more accurately predict future returns. Industry commentators cite this as the death knell for the with-profits policy.

The MVR by Royal London "Life with profit" fund, imposed during the 2008-crash was -25%. Although the markets have now revived the MVR remains still at -20%.