The UK’s life insurance sector has undergone a difficult period in recent years as consumer confidence fell following the financial crisis, the sovereign debt crisis in the eurozone and a decline in asset values.
However, as players launch new products and invest in marketing processes, market sentiment is more positive for the UK life market in 2015 – despite regulatory change and potential sector consolidation shaking.
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"Despite history telling us that it won’t," Phil Jeynes, head of account development and public relations at Vitality, the new name for PruHealth and PruProtect is optimistic that that the UK’s life insurance market will grow in 2015.
Jeynes says: "More insurers are putting their head above the parapet through advertising, sponsorships and marketing to the public and via advisers. We’ve also seen cooperation across the industry on projects such as the 7Families campaign which is gathering momentum and raising the profile of income protection."
VitalityLife, the new name for PruProtect, has already launched three new protection products: LifestyleCare Cover; a short term income protection option; and Mortgage Plus Plan.
LifestyleCare Cover, for example, aims to address the UK’s changing population demographic.
According to VitalityLife, it is expected that around 60% of people over 65 will need some form of care. By 2017, it says there will be more elderly parents in need of care than there are children to provide it.
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By GlobalDataGiven this context, LifestyleCare Cover provides people with lifelong cover that pays out on death or if they suffer an illness that leaves them permanently incapable of looking after themselves.
The product permits a preselected proportion (up to 100%) of their life cover to be accessed early, in the event of the insured being unable to permanently look after themselves.
An accelerated benefit (20% of the chosen LifestyleCare benefit) will be payable on early diagnosis of Alzheimer’s Parkinson’s or dementia as defined by the Association of British Insurers (ABI).
Trends in 2015
Jeynes highlights the UK’s ageing population and the increase in degenerative diseases like dementia as a continuing trend shaping the UK life market.
"It’s crucial that we continue to innovate and adapt our product offerings to meet these changing needs, while also supporting the traditional heartlands of mortgage and family cover," says Jeynes.
As Kevin Carr, chief executive of Protection Review, says: "Our industry sells lots of cheap life insurance, but that often isn’t what people really need. As a society we are living much longer on average and living with ill heath, so the industry is not really selling enough of the products people really need."
Industry consolidation
Aviva’s proposed £5.6billion ($8.8 billion) takeover of Friends Life has been one of the most major developments of 2014. As Life Insurance International was going to press, it was announced that agreement has been reached on the terms of the proposed deal.
The proposed acquisition follows the UK government’s radical overhaul of the pensions market.
Under the current tax system, people are charged 55% if they choose to withdraw all of their defined contribution pension savings at the point of retirement.
This means the majority of people instead purchase an annuity and receive taxable income over the course of their retirement.
However, in the UK government’s budget in March 2014, the UK government said under the new system, an individual will be withdraw their savings at a time of their choosing subject to their marginal rate of income tax.
Commenting on Aviva’s proposed takeover of Friends Life, Cathy Garner, active underwriter at ANV Syndicate 779, says it seems to be almost the end game of consolidation in the UK life market.
In Garner’s view, consolidation brings many opportunities for more niche players. Garner says: "Larger players concentrate heavily on market share and reinsurance arbitrage, and the very real needs of the "less than vanilla" are ignored.
Couple this with the fact that some protection products have become unnecessarily complicated in the drive to differentiate – for example, the arms race of endlessly increasing numbers of critical illnesses covered – and it takes very little effort to see that conditions are producing a market where simplicity and ease of access will be a real asset."
Meanwhile, Jeynes says: "If as is rumoured, more major players merge we must be mindful that in many cases 1+1 doesn’t equal 2 in terms of new business or, often, service and support.
"We’ve seen some new entrants to the sector in recent years and there remains space for innovation and fresh thinking. It’s vital that we show leadership as we have done of late and drive the industry forwards in terms of relevance and scale."
Wearable technology
Wearable health and wellness technology, such as Google Glass is a hot topic in the life insurance market currently and demand for this technology is expected to grow.
Asked if technology will as emerge as a major change driver in the European / international (re)insurance sector in 2015, Jeynes says undoubtedly, yes.
He says: "We have the ability to have ongoing dialogue with our customers and to offer them dynamic methods of understanding and improving their health. This improves their life, our book of clients and society in general.
All of this is facilitated through technology and wearable devices. This isn’t a fad which will fade away, it’s a fundamental part of modern life and while it will change and progress, it is here to stay and must be embraced."
Carr adds: "In the next three to five years, big data will meet in a triangle with wearable technology and the insurance market. When those three properly connect, that is where you will see the biggest revolution in the protection market. This is because it is a situation where insurers will be able to monitor significant amounts of information on people. "
Reinsurance
David Heeney, chief marketing officer at Pacific Life Re – the reinsurance subsidiary of Pacific Life Insurance Company – expects the longevity reinsurance market to remain strong in 2015 with a healthy ongoing flow of completed transactions.
He says the protection market is harder to predict and will be subject to multiple influencing factors.
"On the positive side we are seeing substantial investment in new products and sales processes particularly within the D2C segment. At the same time the number of advisers, both in the independent and tied/bank segments looks set to fall which is likely to reduce sales volumes of advised business," says Heeney.
Asked what developments / trends will drive change in the UK life insurance sector,
says the most significant developments and trends will be around product and sales process simplification making it easier for customers to access the protection market and to buy the cover they need quickly and easily.
The removal of compulsory annuitisation will also encourage insurers and reinsurers to look at new product developments to enable customers to manage their finances effectively in retirement.
In terms of the main challenges facing the UK life insurance sector in 2015, Heeney says raising customer awareness of the need for protection cover and enabling quick and easy access to high quality products remain both the biggest challenge and the biggest opportunity.
Heeney says: "The investment in technology to improve customer journeys is starting to produce results and I expect this to gain further momentum in 2015.
The Seven Families initiative is another major commitment by the insurance and reinsurance sectors which I expect to have a significant impact in raising customer awareness."
[The Seven Families campaign is a charity led campaign supported by major life insurers in the UK to provide a tax-free income for one year to seven people who have lost their income because of a serious or long-term illness or disability].Global outlook
The life insurance sector will be notably stronger in both the advanced and emerging markets, and global in-force premiums are forecast to increase by 4.8% this year, and by around 4% in 2015 and 2016, according to Swiss Re.
Macroeconomically, the reinsurer says global economic activity is expected to improve next year as growth rates increase in the US, the Euro area and many emerging markets. Other countries, such as the UK, Japan and China, will slow.
Kurt Karl, Swiss Re’s chief Economist, says: "Stronger economic activity will improve insurance premium growth, particularly in the emerging markets."
However, Karl adds that profitability will still be challenging because of the low investment yields.
In terms of the life market outlook, Swiss Re says premium growth of in-force life premiums in the advanced economies is expected to be nearly 4% this year and about 3% in 2015, rebounding from a 1.5% decline in 2013.
It said emerging market life premiums are forecast to grow 9% this year and 10% in 2015 after a sluggish 4.5% advance in 2013, driven again by a robust 13% premium growth in emerging Asia.
Despite low investment returns, Swiss Re says life re/insurers have improved profits over the last year with a RoE of about 12% up from 10% last year. This stems from their focus on new products, increased market penetration, improved distribution techniques and cost-cutting.
Viewpoint from Carlos Wong-Fupuy, senior director, analytics – EMEA at A.M. Best
The market has experienced a lot of pressure and we are expecting [there will have been] some recovery in 2014 in developed markets like the UK and Germany. But we are not going to see any impressive growth.
We are talking about a slight recovery from previous years where the growth has been very slow or there have even been some declines in premiums.
Some markets have also been very volatile, such as Italy and Spain, that have been affected by the Eurozone crisis and at the same time, there are a number of products, especially single-premium ones that are sensitive to tax changes.
[Following the UK annuity reforms] I would expect the life insurance industry to focus on offering investment alternatives with very limited guarantees as pension pots which otherwise would have been annuitized are being unlocked.The low interest rate environment is also affecting Germany where there are traditional products with relatively inflexible guarantees.
Companies are being careful about expanding this business because of the capital requirements involved and the risk of not being able to meet the investment guarantees in the long term.
What may drive significant premium growth could be some big transactions, such as bulk purchase annuities in the UK because that is business that is still coming from defined benefit occupational schemes. There is, however, significant uncertainty about the long term interest rate environment when pricing these transactions.
Global life market challenges
The main challenge [facing the global life market] is the low interest rate environment and the limited opportunities to invest. Insurance companies therefore have to be more creative on how they invest.
For example, some of them are getting into infrastructure projects, property development and more illiquid assets, which potentially could offer a higher yield. Regulation will also play a material role on companies’ appetite to invest in alternative assets, depending on how these are treated for regulatory capital purposes.
