Illogical Consequences, or Sophistries of the Second Order
a mutual office only the first two of the numbered statements in the preceding
section have any axiomatic force. The
remaining six and their conclusions remain propositions. As the foregoing
account has demonstrated, they have not been proven and might even then have
been discredited. It is thus doubly
inappropriate to enshrine them as premises, and use them to support a second
tier of argument. And yet this is in effect what was done.
The more notable second order fallacies are:
Society has disbursed, or is in the process of disbursing, the majority of
the asset and liability estates to current members whose policies have
matured or are about to do so. This
is analogous to a return of capital to shareholders, for which there is
a smaller masse de manoeuvre, or strategic investment reserve that
can be used for business development or short term smoothing will be
retained, but no other working capital is needed.
The With Profits Fund will then move from a predominantly
asset-financed to a leaner occasional liability-sharing insurance model.
the unguaranteed portion of members’ stated total policy values is being
used to cover a (we hope temporary) technical solvency gap while total
policy values are being paid out at maturity as they arise, it is
permissible to show undiscounted policy values to individual members, but to
use discounted values for determining the absolute solvency margin when
making operational decisions at Board level and below.
Likewise, it is only the absolute solvency margin that is of
legitimate regulatory concern. Under
these circumstances it would surely be undiplomatic to reveal the size of
the discount to individual policyholders, since this represents a liability
and they are trustfully expecting continued profit.
It would be similarly inconvenient to draw the regulator’s
attention to the size of the technical solvency gap by calculating the total
current liability as measured by the aggregate of undiscounted total policy
the technical solvency gap has taken up most of the unconsolidated and
unguaranteed portion of the fund, it will become necessary to deduct the
value of any optional guarantee (if exercised) from total policy values at
maturity in order to maintain absolute solvency (rationale underlying the
Dec 22nd 1993 GAR Differential Terminal Bonus Policy Board
more extreme circumstances the value of the optional guarantee (if
exercised) could come to exceed the total discounted policy value at
maturity. If this difference were to be deducted from the guaranteed portion
itself, then a) the guarantee would be breached and b) the fund would be de
facto officially insolvent. Hence when this point is reached it should
not be indicated, and a sum in excess of the policyholder’s discounted
asset share must be paid out, which can only come from the Fund’s other
pooled assets (rationale behind the 1993 GAR Board Resolution amendment).
of whether later economic circumstances will make them worthwhile, at least
the full value of non-optional guarantees will be clawed back. In the case
of guaranteed interest rate annuities, the annual rate of return that
ensures a level annuity is guaranteed by 3.5% p.a.
This safety feature is a selling point, and will become part of the
policyholders’ reasonable expectation.
On the other hand, policyholders might be displeased to find out that
the necessary rate of return to keep the annuity level will be increased
annually by the same amount as the interest rate level portion that is
guaranteed, i.e. 3.5%. As a
result both the guaranteed and un-guaranteed portion of the annuity will
progressively diminish by 3.5% p.a. regardless of whether the fund earns
less than that amount per year for any length of time12.
This will help the Society by extending the technical solvency margin
of the With Profits Fund. Hence
this aspect of the guarantee should not have any prominence in sales details
or product particulars. (Cf.
Section 10 below; R & H sections 3.1.4-6, 3.2 & 3.3.2).
Any forensic terrier worth its
keep might now dispatch these six rats in short order: viz- assuming this is
what happened, (1) is inconsistent with the concept of ongoing mutuality, and
hence fundamentally improper. (2) undermines the fundamental concept of a
“with profits” fund, and so over and above requirements for regulatory
financial strength it must be fully disclosed and not covered up as in 3). (4)
makes the optional guarantee worthless, and (5) makes others underwrite that
guarantee if exercised. Non-optional guarantees that are eroded at full value
regardless of whether they are needed as in (6) are no guarantees at all at
best, and automatic penalties at worst; they are also a two edged sword because
of the established custom of paying policy values in full. Hence they merely
transfer the Society’s obligations from the guaranteed portion to the “moral
charge”, of which more anon.
It is therefore hardly
surprising that these points remain matters for the courts, the Financial
Services Ombudsman and the regulators. The details are, however, beyond the
remit of this article, the main purpose of which has been to reveal the
coherence, consistency and duration of the structure of which they as wrongs
form a part, and to demonstrate their individual places in it.
Nevertheless this objective is an essential prerequisite for the
assessment of any underlying element of fraud, and there is otherwise the danger
of its being overlooked in piecemeal wrangles over the separate issues.