Reliance Mutual members ‘on the precipice’

Reliance Mutual members will be asked to formally approve how the company is being run at the end of this month – the first time a mutual has asked this question since the Equitable Life debacle – after a long-running regulatory debate comes to a head.

Thankfully, Reliance Mutual is in a very different position to the beleaguered insurer, but it is asking members to ratify a strategy that the firm has been advocating since 2001, after discussions between the FSA, mutuals and insurers called Project Chrysallis called it into question.

The vote has come about because when Reliance Mutual stopped offering new with profits policies in 1999, the board took the decision that rather than ceasing to look for new business, and run off the fund distributing surpluses to the with profits holders as they arose, it would be better for all concerned to operate a “non-profit” business, and pursue a strategy of acquiring other insurance businesses. The aim, said Mark Goodale, chief executive of Reliance Mutual, was to “spread operating costs and bring benefits to all policyholders through greater security for all, and improved bonuses to our ‘with profits’ policyholders”.

He added: “As part of this strategy, we started distributing surpluses arising from our ‘non-profit’ and ‘unit-linked’ business in the form of substantial additions to final bonuses on ‘with profits’ policies. So ‘with profits’ policyholders were rewarded for providing the capital necessary to write new ‘non-profit’ business and acquiring other insurance businesses.

“However, in recent years, there has been a debate between mutual insurers, like Reliance Mutual, and the FSA as to how ‘with profits’ policyholders receive a fair share of the assets of the business when their policies pay out.”

So, despite running its business successfully this way for more than 11 years, and the FSA agreeing that the strategy used “is likely to have resulted in an outcome that would have been no worse for our ‘with profits’ policyholders than a run-off and distribution strategy, so policyholders are unlikely to have suffered adverse consequences to date”, said Mr Goodale, they are putting it to a vote.

All mutuals were required to justify their strategies as part of Project Chrysallis, and the FSA concluded that what Reliance Mutual had done, in its view, was not compatible with its view that the right course of action would have been to run off and distribute the fund. The board disagreed.

Mr Goodale added: “First of all, the FSA’s views were that according to the rules they introduced in 2004/2005, strictly speaking what we did in 2001 was wrong. Having stopped writing with profits business, we should have stopped writing new business. But because we shared the profits [of the new business] with these policyholders, we did not seek their approval.”