Insurance chiefs deemed 'out of line

The chief executives of some of the UK's biggest insurance companies face heavy criticism from MPs today for accepting huge pay rises at a time when millions are facing endowment policy shortfalls.

Appearing before the Treasury select committee, the heads of Aviva, Legal & General, Prudential, Royal & SunAlliance and Standard Life conceded that around 70% of those who took out an endowment mortgage faced a shortfall. This will cost consumers between ?30bn and ?50bn in the next 10 to 15 years.

But despite the problem faced by the industry, the chief executives received pay rises of between 45% and 71% between 1999 and 2002.

John McFall, the committee chairman and Labour MP for Dumbarton, said: "From 1999 to 2002 the industry went downhill like an Olympic skier. At a time when the average pay rise is 3.5%, how do you justify [yours]?" He added: "When people are suffering and feeling the pinch, it seems that this is way out of line."

During the questioning, the chief executives were accused of failing to have a duty of care to policyholders and not doing enough to encourage people to complain about the possible mis-selling of an endowment mortgage.

Mr McFall said that industry estimates suggested the shortfall would cost consumers ?30bn, but the problem would not "cost the industry a bean". He said: "The industry consistently puts its own interests ahead of those of consumers."

The insurers admitted that people whose policies were unlikely to be big enough to repay their mortgages would face shortfalls averaging ?3,500 for Prudential-branded endowments and ?7,000 for those from Royal & SunAlliance. Furthermore, Standard Life said it had received mis-selling complaints about roughly 10% of the policies it sold itself between 1988 and 1994, of which 9% were upheld. Prudential said it had received complaints about 6% of its policies.

Legal & General said 3.8% of endowment policyholders had made complaints and it had upheld 2.5% of these. Aviva said it had received complaints about 4% of its Norwich Union policies and upheld 2%. Royal & SunAlliance said 6% of policyholders had made complaints, around half of which had been upheld.

But Jim Cousins, a Labour MP, said consumer groups estimated that up to 50% of people had been mis-sold endowment mortgages, and he suggested firms did not do enough to let policyholders know they could complain.

The firms said that leaflets about endowment shortfalls, produced by the Financial Services Authority, were sent to their customers. Firms also sent information about the various options open to people whose policy was unlikely to be big enough to pay off their mortgage.

But they conceded that they never used the same letter to tell people both that they faced a shortfall and that they could complain if they thought they had been mis-sold.

Mr McFall claimed it was consumers who had to shoulder any shortfalls if the policy they were sold was too small. "The dice are loaded in favour of the insurance company," he said.

Jonathan Bloomer, chief executive of Prudential, one of the companies coming under fire, said the firm was sorry for those customers who had been mis-sold endowment policies.

"If you mis-sell in the first place you have to compensate policyholders. We very much regret any mis-selling we've done. It is in our own long-term interests ... to deal with people we have mis-sold," he said.