The Maturity Structure of Administrative Costs : Theory and UK Experience

Front-loading of charges on insurance products can impose considerable costs on consumers when policies lapse early. This paper develops a theory of the maturity structure of charges similar to that used to examine the term structure of interest rates, and applies it to the UK experience with individual accounts. We find that the implied term structure of charges was historically sharply decreasing (so that charges relative to the account balance were higher the shorter the maturity of the account), with implicit yields in the early years of an account strongly negative. In the past year, however, the relationship has changed dramatically as a result of regulated charge levels and structures associated with the new Stakeholder pensions