After a mauling by the great recession in 2008 and 2009, the UK’s life insurance industry is emerging from the depths. However, it appears unlikely to get much assistance from a robust economic recovery for many years at a time when looming regulatory change threatens to undermine its distribution capabilities.
As a success story, the UK’s life insurance industry is hard to beat. Attesting to this is data from Swiss Re showing that in 2009 the life industry achieved a penetration of 10% of GDP, by far the highest of any country in the European Union where the average was 4.5%. It also ranked the UK second in the world, together with South Africa after Taiwan, which achieved a GDP penetration of 13.8%.
However, very high penetration levels are also a strong indication of a market at a very mature stage, despite data produced by the UK industry vindicating its claim that there is a huge protection gap waiting to be filled.
In the UK, the signs of a mature industry are also evident in what has been a get-nowhere decade for premium income growth. According to the Association of British Insurers (ABI), domestic life premium income began the decade at £128.5bn ($206bn) in 2000, reached a peak of £185.4bn in 2007 and then slumped by 29.5% under the pressure of the financial crisis to £130.7bn in 2008 and by a further 9.4% to £118.4bn in 2009.
The UK’s life insurance market rebounded in the first half of 2010 with a survey by professional services firm PricewaterhouseCoopers (PwC) finding that insurers had experienced growth in business volumes across all categories of customers.
Reinforcing PwC’s findings, in its third quarter 2010 results statement life insurer Legal & General (L&G) highlighted that: “savings ratios are rising in the UK” and “annuity markets are experiencing strong demand”.
In the third quarter of 2010, L&G experienced record new UK savings business with annual premium equivalent (APE) of £961m, up 43% compared with the third quarter of 2009. Individual annuity new APE business in the third quarter of 2010 rose 12% to £91m, but on the negative side new protection business APE fell 2% to £130m.
According to the ABI, L&G was the number-one ranking life insurance company in the UK in 2009 based on total business (£8.953bn), but was second to Lloyds Banking Group (£10.574bn). Lloyds Banking Group leapt into the top position in 2009 thanks to its acquisition of embattled bank HBOS that year. L&G was ranked by rating agency AM Best as the world’s ninth-largest insurer in 2009 by total assets.
Also displaying a significant improvement, Aviva reported long-term savings business of £8.868bn in the first three quarters of 2010, up 22% compared with the first three quarters in 2009. Annuity sales in the first three quarters of 2010 were 83% higher at £2.291bn while Aviva noted that in the third quarter alone it had written more individual annuity business (£1.746bn) than in the whole of 2009. Protection sales were up 4% at £737m.
According to the ABI, Aviva ranked fourth in 2009 based on its total UK business (£6.402bn). AM Best ranked Aviva as the world’s sixth-largest insurer in 2009 by total assets and 12th by total net premium income.
However, strong performances from L&G and Aviva do not appear to reflect the general tone across the market as a whole. As an indication of the full picture, Swiss Re anticipates that industry-wide, life and health insurance new business premiums in the UK will have reflected only a 4.4% rise in 2010 and predicts that growth will slow to 2.5% in 2011 and 3.6% in 2012.
Reflecting Swiss Re’s 2010 estimate, Prudential displayed a subdued improvement the half-year to June 2010, reporting total UK APE sales of £382m, up 2% compared with the first half of 2009.
However, the insurer emphasised that it was following a strategy of “value over volume”. Prudential ranked sixth based on total UK business in 2009 (£5.78bn).
According to the ABI, 934 companies are authorised to carry out insurance business in the UK. Of these, 701 carry out general business only, 190 long-term business (such as life insurance and pensions) only, and 43 both general and long-term business.
Slow economic recovery
Swiss Re’s forecast for 2011 and 2012 also appears in keeping with the slow pace of the UK’s economic recovery. According to the UK Treasury, private sector analysts estimate growth in GDP in 2011 is 2%, up from about 1.7% in 2010.
Unemployment also remains stubbornly high at around 2.5m, or 7.9% of the workforce. The situation could deteriorate in 2011, warns the Chartered Institute of Personnel and Development. The body predicts that 80,000 private sector and 120,000 public sector jobs will be lost in 2011, taking the unemployment rate to about 9%.
Adding to pressure on employment, the Office for Budget Responsibility estimates that 330,000 civil servants face redundancy over the next four years.
Also concerning is a new study of the financial situation of families by Aviva.
The study revealed: “Many UK families are under extreme financial pressure, with 39% saying they are too stretched to take on any additional financial obligations.”
The study also found that a third of families have no savings and that 40% currently save nothing each month. Aviva noted that the latter finding might suggest that some people who have saved in the past have stopped doing so. Even among families that do save, a quarte# have less than £2,000 put aside.
Also highlighting the pressure on savings was a recent study by Lloyds TSB, a unit of Lloyds Banking Group. In the study, the bank found that household savings took a severe beating during the financial crisis, with the impact most severe in 2008 when households accumulated £10bn in new savings, 88% lower than the 10-year average of £80bn. There was a marked recovery in 2009 with households adding £41bn in new savings, although this was still well below the record £134bn saved in 2006.
Also of note in Lloyds TSB’s study is a marked preference among savers for deposit products. Specifically, Lloyds TSB found that deposit-based savings’ share of total new savings increased to 70% in the 2000s compared with 49% during the 1990s.
Life insurance and pensions savings fared particularly badly in 2008 and 2009, falling to 19% and 13%, respectively, of total new household savings. This was well down from an average of 44% between 2000 and 2007, and significantly lower than the record of 63% seen in 2007.
Reflecting concerns related to UK household savings, rating agency Moody’s Investors Service downgraded L&G’s insurance financial strength rating to Aa3 from Aa2 in late-2010. Moody’s cited a high level of household indebtedness and sluggish UK economic growth as limiting factors on life insurance market growth opportunities in the near term. Moody’s believes this will negatively impact business and profitability growth at L&G which generates more than 90% of its premium income in the UK.
Retail Distribution Review
Also looming on the life industry’s horizon is the Financial Services Authority’s (FSA) Retail Distribution Review (RDR), due to be implemented at the end of December 2012. The RDR, is likely to “radically” change the life insurance market, warns consultancy Accenture in a 2010 report on the impact of the RDR, entitled How Bancassurance can Dominate the UK Life Insurance Industry.
Key changes the RDR will bring are that advisers will need qualifications to do business and will not be able to accept commissions from product providers.
“Once enacted, RDR will, at a stroke, remove commission as a competitive lever by which life insurers can control distribution,” stressed Accenture
According to FSA director, insurance sector, Ken Hogg, objectives with the RDR are to:
- Improve the clarity with which firms describe their services to consumers;
- Address the potential for adviser remuneration to distort consumer outcomes; and
- Increase the professional standards of investment advisers.
The general view is that the RDR will lead to independent financial advisers (IFA) exiting the market. Based on a survey of IFAs, JPMorgan Asset Management estimates that about one in seven (15%) of around 30,000 IFAs will leave the industry after the RDA is introduced. Professional services firm Ernst & Young estimates that the number of IFAs will fall by a quarter by 2013.
For banks, Accenture believes that the introduction of the RDR represents a major opportunity for them to capture a larger share of the life market.
“For UK banks, it represents nothing short of a one-off opportunity to create a bancassurance market to rival the success of their counterparts in Europe,” stressed the consultancy in its report.
According to European insurance and reinsurance industry body, the Comité Européen des Assurances banks accounted for 17% of new individual life insurance sales in 2008 and about 2% of new group sales. Accenture noted that banks’ share of new individual life business fell to 14% in 2009 compared with 19% in 2007.
However, in certain insurance categories, banks have made notable inroads, For example, in 2009 banks accounted for more than 35% of investment and savings products and more than 20% of individual pensions, according to Accenture.
Banks also have the potential to gain market share among younger consumers. Accenture found that among consumers aged between 18 and 24, when choosing between insurers and banks for financial advice, 61% prefer banks. Among consumers aged 25 to 34, 52% prefer banks.
However, among consumers aged 35 and over, between 63% and 66% prefer insurers. Across all age groups Accenture found that, on average, 41% of consumers view banks as their preferred source of financial advice.
Despite signs favouring an increase in bancassurance, Accenture believes they still face challenges if they are to persuade customers that the bank is the best channel from which to buy their life insurance. Not least of these, stressed the consultancy, is the general erosion of trust in banks among consumers in the wake of the financial crisis.
Also of note in Accenture’s report is the increasing significance of the online distribution channel. Accenture noted that although the success enjoyed by general insurers – particularly motor and home insurance – on the internet has not yet been achieved by life insurers, there are signs that life insurance, particularly for simpler products, is beginning to take off online. In its report, Accenture indicated that nearly one quarter of UK consumers that bought life insurance in the last year purchased it online.
And it is a trend that the consultancy anticipates is likely to grow as the propensity for buying online increases, particularly among younger consumers. In its report, Accenture noted that among younger consumers, 35% of those aged 18 to 24 prefer the online channel for buying life insurance. Among those aged 25 to 34, almost 30% prefer the online channel.
Accenture found the popularity of the online channel for buying life insurance falls to 21.4% among those aged between 35 and 44, 24% among those aged 45 to 54, and 16% for those aged 55 and over.
As a sign of the internet’s impact, Barclays Bank has announced its intention to terminate its in-branch investment advisory services in favour of the online channel. Barclays said its move reflects the emerging trend that customers are increasingly purchasing and managing their investments online. A bold move, but it is also one that must raise questions among insurers as to what their response to changing consumer preferences should be.
Overall, a pedestrian economic growth rate, financially stressed consumers and sweeping regulatory changes that bring banks onto the scene as potentially far stronger competitors seemingly pose the most daunting combination of challenges faced by the UK’s life industry in decades.