Yawn of the dead.

Anyone remember Simon Dee? To refresh any aging memories out there (as you’re probably over 50 if you do remember him), Simon Dee hosted the Dee Time show in the late Sixties and had over 18 million viewers. Which was impressive at the time as that covered just about everyone with a television. For two brief years he was the most famous man on TV and very much enjoyed spending his £100,000 salary on life’s good things to the point that he made Chris Evans’s binges look like Hannah Hauxwell sneaking an extra digestive at the vicars tea party.

So what happened? Well his wage demands become too high, his ego too big and he fell to earth after his contract was cancelled. He struggled with debts for many years and even spent a month behind bars for non payment of rates, ultimately winding up as a bus driver.

Now, not a lot of people know that, because once off the radar he was never mentioned again. In those days, when your star stopped burning you quietly exited stage left and were never seen again. In modern times however even the most minor of celebrity can stretch out a living for a good few years. Admittedly they need to leave their dignity, respect and any last remnants of self worth at the ITV2 studio doors, but that is a trade off that many seem happy to make.

Let’s just throw a few more names at you from the past and see if you remember them. Pearl Assurance? Scottish Mutual? Clerical Medical? United Friendly? Equitable Life? Jog any memories? Yes, thought so. Have you ever wondered where they are now?

Back in the Seventies and Eighties most insurance companies employed salesmen to go around knocking on doors and selling their products. We all remember the man from the Pru. You didn’t need any qualifications, just a thick skin and some smooth talking. One day you were digging holes in the road, the next day you had a suit and a briefcase and you were an insurance man.

Earnings were good for the successful ones because the commissions were very generous, largely due to the obscenely high charges applied within the plans that weren’t exactly highlighted on the front page of the glossy brochure.

In the Nineties however regulations were tightened up dramatically and the FSA (and its predecessors) essentially gave the insurance companies two options. Either tidy up your act, or get out of town.

So some of them thought ‘right, let’s train our staff, lower our charges, make our products more transparent and generally get into line’. They  joined the mainstream and many are still around today.

Others thought ‘nah that’s looks too much like hard work and we’d rather just keep the big pot of policyholders money that we have and shut the doors to new business’, and that’s exactly what they did because the charges they receive on their existing funds are too good to give up in the name of ‘being a good company’. They are referred to as closed funds.

A less salubrious term is ‘zombie funds’ because they are half way between alive and dead. In celebrity terms they are a long way from prime time Saturday night but not yet driving a bus. Probably eating bugs in a jungle somewhere or having their wedding/funeral/mothers hip replacement filmed.

The problem with closed funds is that they still need to be managed and investment decisions taken. Growth is normally generated in funds by investing in growth assets such as shares and property and holding a percentage in defensive funds for security such as cash and bonds. Normally the inflow of cash from new investors can be used to pay the outflow of leaving investors, meaning the percentage of money held growth assets can remain high.

If however there are no new customers but only exiting ones, then a larger proportion of the fund needs to be held in cash which produces a lower return, which annoys more of the remaining policyholders, so they leave which means that more has to be held in cash which means the returns are lower….you get the idea. The trick is not to be the last person standing. A bit like musical chairs but staking your life savings to spice it up a bit.

The moral of this story is that just because an insurance company hasn’t died it doesn’t mean that it isn’t in a coma somewhere, being kept alive by the life support of your policy charges. Oh, and if you are with Resolution or Phoenix then that is like a hospice for terminally ill insurance companies.

So, don’t assume that just because you get a statement every year that they are still prime time. Maybe you should have a dig about at the bottom of your wardrobe and check that none of your policies are the financial planning equivalent of a Celebrity Wife Swap contestant……..

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