Norwich Union cuts final bonus rates

The UK's largest insurer, Norwich Union, announced today that it is reducing final bonus rates on its with-profits policies, affecting holders of endowments, stakeholder pensions and personal pension policies with the group.

The insurer blamed adverse conditions in the UK stock market for its decision to slash final payouts on affected policies by 5%, and the annual bonuses paid on certain other policies by 0.5%.

The news follows a survey carried out by Money Marketing magazine and KPMG last week which showed that some of Britain's biggest insurers are sailing uncomfortably close to their solvency margins, with some financially weaker than troubled insurer Equitable Life.

Commenting on today's decision, chief actuary at Norwich Union Mike Urmston said: "The change in regular bonus rates is part of the prudent management of the with-profits fund. We are seeking to achieve the correct balance between the proportion of the overall return that is paid in the form of bonuses guaranteed on maturity or retirement, and the non-guaranteed final bonus."

With-profits funds work by pooling investors' money, and then awarding regular bonuses to policyholders. The idea is that the insurer will 'smooth' bonus payments over a period of years, using surplus assets accumulated in good years to cover losses suffered in bad.

The insurer said that poor stock market performance, particularly a 25% fall in the UK stock market this year, had resulted in an overall return to July 18 this year of minus 8.3% on its with-profits fund. This compares to the assumption it made at the beginning of the year that the fund would earn 7.25% for the full year.