The Society of Actuaries and the Department of Enterprise, Trade and Employment have written to all life assurance companies suggesting that they boost reserves by 10% to 20%.
It is understood that the warning was prompted by fears that with profits life policies will deliver less to policyholders than what they thought was being offered. The letter specifically mentions policies that offer high bonuses - up to 9% in some cases - in the first year of the policy. But, the letter warns, such high figures do not reflect realistic returns and therefore such policies could be construed as misleading.
The letter points to a situation where policyholders, because of poor sales information, could be misled into expecting high returns year-on-year. If forced to pay out, because the policy was mis-sold, assurers would have to boost the reserve on each policy by 10% to 20%, according to the Society of Actuaries.
The situation has been exacerbated due to the recent poor performance of equities. The recent problems of Allied Irish Bank and Elan have wiped E1bn (£610,000) off pension fund values, according to market experts. It is estimated that pension funds typically hold 2% to 3% of their portfolios in blue chip companies.
