U.K. insurers had another $4.2 billion wiped off their market value today as regulators said they plan a probe into policies stretching back to the 1970s, the second government threat to earnings in as many weeks.
The Financial Conduct Authority will publish a plan of its priorities for this year on March 31 that will include an examination of how customers in the life-insurance market have been treated, the London-based regulator said in a statement.
Shares of Prudential Plc, Aviva Plc, Resolution Plc and Legal & General Group Plc all fell in London trading. They pared their losses in the afternoon after the FCA said it wouldn’t apply current standards retroactively on old policies, dubbed “zombie funds” by analysts including Tom McPhail of Hargreaves Lansdown Plc.
“These are huge challenges for insurance companies to deal with,” said McPhail, the brokerage’s London-based head of pensions research. “It could provoke certain questions to those companies with closed books of business. It’s been a perfect storm of news.”
The FTSE 350 Life Insurance Index fell 2.6 percent. That added to the 3.6 billion pounds ($6 billion) wiped off the industry’s market value on March 19, when Chancellor of the Exchequer George Osborne’s budget scrapped rules that pushed retirees to buy an annuity.
The “shock” from the FCA “does highlight a trend with the regulator for concern around long-term policies, coupled with customer inertia,” said Nick Henderson, an insurance partner at KPMG in London.
The FCA said this afternoon it would review a sample of insurers and did not intend to individually examine every policy written dating back to the 1970s. It also has no plans to disallow exit fees charged on holders that want to leave their policies, if those levies were compliant with the law at the time they were written.
The Daily Telegraph reported earlier that the FCA would review 30 million policies, citing Director of Supervision Clive Adamson.
“This is not a review of the sales practices for these legacy customers and we are not looking at applying current standards retrospectively,” the regulator said. Earlier, the FCA told Bloomberg News that most policies examined would be more recent than the 1970s.
Resolution and Phoenix Group Holdings, which manage closed books of older insurance policies, led the selloff, falling 7 percent and 12 percent respectively.
“We are confident that our historic charging structures, including exit charges, have been compliant,” Phoenix said in a statement. Resolution Chief Financial Officer Tim Tookey said the company has an executive committee that closely monitors the outcomes of all its customer policies.
Legal & General, Britain’s biggest manager of pension assets, lost 3.5 percent today after earlier falling as much as 9.1 percent. The company called on the FCA to publish details on the review before March 31, citing a “disorderly market.”
Aviva fell 2.8 percent. The company said it expects any impact on profit to be “minimal if at all,” affecting less than 2 percent of the company’s embedded value.
Prudential fell 2.6 percent. The U.K.’s largest insurer by market value said it would “work closely” with the regulator. Standard Life dropped 1.6 percent.
The FCA said no conclusions have been reached, with the work due to start in the summer. The Telegraph said the probe would center on pensions, endowments, investment bonds and life insurance sold by door-to-door salesmen on commission.
The U.K. regulator said in February that it’s starting a study into competition in the annuity market after finding that the industry was “not working for consumers.” It also said it would look into sales practices.