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Significant stock market falls in the past two months mean that 2 million endowment and pension fund customers of Standard Life face smaller payouts and higher penalties if they cash their policies in early.
A 37% fall in the FTSE 100 since August has forced Standard Life to increase charges and extend the range of products being hit by the penalty charges.
The insurer is raising the exit penalty on one of its pension funds to 30%, while mortgage endowment customers face new exit charges.
The decision by Standard Life follows steps by other insurers to penalise customers who cash in policies early. It comes ahead of its third quarter trading statement today, which will be scrutinised for evidence of its financial strength in the face of stock market volatility.
Standard Life was forced to demutualise and float on the stock market in July 2006 because of its weakened financial position. In its interim figures in August, it boasted that the company was "resilient to market falls".
Concerns have resurfaced about the health of the insurance industry following the turmoil in the banking sector, where HBOS, Lloyds, TSB and Royal Bank of Scotland are being bailed out by the taxpayer. The Bank of England admitted it was looking at insurers in this week's financial stability report - a health check on the financial markets - while Aviva revealed that £600m of its surplus capital had been wiped out in less than a month.
Insurers' share prices were broadly higher yesterday as the FTSE 100 enjoyed its third largest percentage gain on hopes of interest rate cuts. Aviva jumped 25%, Prudential 19% and Standard Life 13%, but Friends Provident dropped 7%.
As the market waits to learn whether Standard Life will review its dividend policy, its customers will begin to feel the pain. Customers with a regular premium pension will have their final bonuses cut by between 8% and 14%, while payouts for mortgage endowment customers could fall by 11% to 13%. Final bonuses have already been cut by up to 9% this year for some policyholders. Mortgage endowment customers would face a "market value reduction" (MVR) - an exit penalty - of up to 7%, although the average charge would be 1.6%. Early withdrawals could previously be made without a fee.
Standard Life said the changes were being made to ensure all policyholders were treated fairly.
"The changes we have made will ensure that we maintain fairness between plan-holders who choose to leave with profits and those who remain invested until their plan maturity or retirement date," a spokeswoman said.
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