Life firms risk ?20bn in fines

The life insurance industry could be walloped with a £20 billion bill for mis-selling mortgage endowment policies if regulators decide that millions of policyholders should never have been sold them, says a report out today.

Basing his projection on the fines on companies for mis-selling personal pensions, the leading insurance analyst Ned Cazalet says there is a danger that the industry could be forced to foot a colossal bill.

The regulator is looking into the endowment issue, but has not come to any conclusion about possible misselling.

Cazalet's hard-hitting report suggests 10 million endowment policyholders face average shortfalls of £11,000, with the peak not being reached until 2013. If he's right, mortgage shortfalls could near £100bn over the next 15 years.

He says the problem centres on rosy assumptions about returns from the stock market when the contracts were written. He reckons returns will not exceed 6 per cent a year for some time, as many insurers have reduced their exposure to shares in favour of bonds and other instruments, which could cut returns to nearer 4 per cent.

Says Cazalet: 'We estimate that practically all policies maturing four years or more from now will fail to meet the target home loan. These outcomes, if correct, will lead to very many complaints at or close to maturity, as homeowners realisetheir long slog to acquire their property is not yet over.'