Endowment Mortgage Shortfalls: A Growing Concern for UK Homeowners

Strategic Insights -

The life insurance companies that have provided mortgage endowments to millions of UK homeowners are facing intense scrutiny over the potential shortfalls that could leave many homeowners out of pocket. The Commons Treasury committee is set to grill the executives of Legal & General, Norwich Union, Prudential, Royal & Sun Alliance, and Standard Life, which together have about 5.2 million endowment customers. Independent analyst Ned Cazalet estimates that nine out of ten policies could fall short of their targets, resulting in average shortfalls of around £11,000.

Key Takeaways:

  • The Association of British Insurers (ABI) estimates that 75% of endowments are at high or significant risk of falling short, while 25% are expected to reach their target.
  • About 1.5 million people face a projected shortfall averaging £5,000, although the figures are based on research from a year ago.
  • The ABI claims that many people are not reliant on one endowment policy to pay off their mortgage, with 5 million people holding 8 million policies in force.
  • Standard Life saw one third of its 21,000 maturing policies in 2003 fall short by an average of £1,500, while Norwich Union saw 18,000 policies fall short, although these were mostly small shortfalls.
  • The shortfalls are not just a potential problem, with actual shortfalls facing thousands of customers last year.
  • Companies are under pressure to provide more realistic estimates of endowment shortfalls, with the FSA demanding they treat payments expected to be made as liabilities and put money aside to cover them.
  • Standard Life has been setting aside £100 million a year on average for a potential bill of £1.5 billion, while Norwich Union has been reserving £10 million for three years' costs.

Statistics:

  • 75% of endowments are at high or significant risk of falling short (ABI)
  • 25% of endowments are expected to reach their target (ABI)
  • 1.5 million people face a projected shortfall averaging £5,000 (ABI)
  • 5.2 million endowment customers are affected by the shortfall problem (combined total of the five life insurance companies)
  • One third of Standard Life's 21,000 maturing policies in 2003 fell short by an average of £1,500
  • Norwich Union saw 18,000 policies fall short, although these were mostly small shortfalls
  • £100 million a year: the amount Standard Life has been setting aside for potential shortfall costs
  • £1.5 billion: the potential cost of shortfall to Standard Life
  • £10 million: the amount Norwich Union has been reserving for three years' costs

Sources:

  • PAULINE SKYPALA, "The bosses of the life companies that have sown mortgage endowment misery will be grilled by MPs next week when they appear in front of the Commons Treasury committee."
  • Association of British Insurers (ABI)
  • Ned Cazalet, independent analyst
  • Standard Life
  • Norwich Union
  • Financial Services Authority (FSA)