Mortgage holders face new threat

Hundreds of thousands of homeowners told their insurers would protect them from shortfalls on their mortgages will learn soon that they may be among the three in five people facing losses after all.

Two years ago Norwich Union and Standard Life pledged to meet any shortfall in investors' policies at that time. This enabled 770,000 Standard Life policyholders and 830,000 Norwich Union policyholders, who had faced potential shortfalls, to start with a clean slate. Provided policies grew by an average of 6 per cent from the date of the pledge until maturity, investors would have enough money to pay off mortgages.

Standard Life's letter states categorically that the company 'is confident that future investment earnings will be sufficient to provide any necessary support'. But rocky stock market conditions have caused the insurers to make losses, leaving investors with new shortfalls on their policies.

Standard Life, whose pledge covered with-profits and managed-fund endowments, will send 'amber' letters to 9 per cent, or 135,000, of its 1.5m endowment policy holders, indicating a significant risk their policies may not pay out sufficient money; a further 1 per cent, or 15,000, will receive 'red' letters, indicating there is a high risk.

Norwich Union has not yet calculated how many of its 1.3m policyholders will be affected, but letters will be sent to policyholders next month to inform them of their position. David Riddington, a senior actuary with Norwich Union, says it is reasonable to expect the with-profits fund to earn an average of 6 per cent a year over the longer term, but this does not guarantee that policyholders will be able to make good the losses of the last two years. 'Over 10 years they've got a pretty good chance of catching up. If they've got just a few years to run, it is much less likely there is time left for them to catch up.'

AMP made a similar pledge in April last year. Peter Carr, AMP chief actuary, says the company will not be sending red or amber letters to any of its 240,000 policyholders this year. Although the insurer has not achieved the 6 per cent growth needed, he says people with policies maturing this year will not face a shortfall, and he does not believe it will become 'an issue' for policies maturing in the future.