Endowments row hits new heights

Insurance companies could be forced to pay billions of pounds in compensation to homeowners for the mis-selling of endowments, industry advisers fear.

Insurers and regulatory authorities are playing down the crisis over mortgage endowments, but one company adviser said the bill for compensation could be larger than for pensions mis-selling, where estimates reach as high as £20 billion.

The industry may be forced to face up to the endowment crisis when the investment industry ombudsman, Jane Whittles, issues guidelines in the autumn about how insurers should deal with compensation claims.

One insurance industry adviser said it was impossible to forecast the liabilities. 'I think it is going to be quite a problem, to put it mildly,' he said. 'The regulators are trying to avoid it.'

Actuaries and accountants advising insurers on merger deals say potential bills for endowment compensation are increasingly featuring in their pre-purchase work for clients.

Actuaries at PricewaterhouseCoopers are calculating that shortfalls could run to tens of millions at some of the larger endowment providers. This would not be an accurate guide to compensation payments because these figures are for shortfalls, and it is unlikely that insurers will be forced to compensate everyone whose endowment fails to repay their mortgage.

At present, unhappy homeowners have to prove that they were misled about the likely return on the policies, or that the product was unsuitable for them. Industry estimates suggest that as many as 4 million homeowners may be at risk.

Philippa Herz, a senior manager at PWC, said: 'In a merger or acquisition, any purchaser will want to be aware of the risks. It's fairly high up the agenda in M&A work at the moment.'

The Insurance Ombudsman is being inundated with complaints from homeowners about endowments. A spokeswoman said last week that guidelines would be issued to insurers in the hope that more cases could be settled by the insurers.

Nicola Foote, a partner at actuary Watson Wyatt, said she would welcome guidelines from the Ombudsman so that insurers could begin to deal with complaints.