The ITEM Club has forecast that life insurance
premiums in the UK will remain broadly flat in 2012, but growth
should rise to around 5% yearly by 2014/15.
In its spring forecast for 2012, the Ernst
& Young ITEM Club Outlook for Financial
Services explained that the UK’s economic recovery is
expected to drive the growth of life insurance premiums in the UK
by 2014-2015.
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This would push gross life premiums up to
£155bn ($251.3bn) by 2015.
Despite potential advantages for the typical
client, the ITEM Club notes that traditional life insurance
products may have lost ground to competing products.
For example, it says life insurance sales to
older clients have been losing out to other savings plans targeted
at people near retirement age, even though independent comparisons
show insurance delivering a much larger payback in most
situations.
The study says: “This loss of relative market
share should be reversible given the high levels of consumer trust
and confidence in the UK insurance industry. For example, survey
evidence shows that 84% of UK insurance customers are confident
that they have bought the right product for their needs.”
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By GlobalDataCompetition from pensions and investment funds
for future retail inflows will lead to continued pressure on the
profitability of life insurance, exacerbated by new regulatory
requirements, the ITEM club forecasts.
Higher returns wanted
Growing demand for unit-linked policies,
compared to traditional life insurance, also reflects retail
customers’ desire to obtain higher returns at a time of low
interest rates by boosting stock market exposure.
This contrasts with the shift of traditional
life and pension portfolios back towards government bonds since
2008, says the study.
However, the ITEM Club explains that the
higher risks attached to long-term investment-linked policies will
entail a higher capital cost under Solvency II regulations from
2014, and are also attracting concern over sales practices from the
UK’s Financial Services Authority, which will be carried over to
its successor regulator, the Financial Conduct Authority.
The study explains that persistently low
long-term interest rates, which are likely to extend into 2013,
have also disrupted life insurers’ traditional use of annuities to
convert pension lump sums into retirement income.
It notes: “Low annuity rates, further
depressed by rising longevity projections, are now deterring the
take-up of annuities, with more retirees choosing to invest their
lump sums and assume their own longevity risk.
“The EU Commission is working to promote a
European market for annuities as a step towards expanding the use
of funded pension schemes in other member states.
This should eventually reduce their cost in
the UK. Unfortunately, this is happening too slowly to relieve the
present fall in annuity rates.”
Perpetual gilt
The ITEM Club study notes that the UK
government has proposed the issuance of a 100-year gilt, or even
perpetual gilt.
It also warns it is unlikely there are many
pension funds with such long liabilities that they would need to
match, so demand for any such product is likely to prove weak.
Instead, it says a more attractive product for
insurers would be long-dated inflation-linked bonds.
It adds that the government’s main response to
the need for additional longer term, higher-yielding investment
instruments has been the proposal for new infrastructure funds, for
which a £20bn initial target has been set, and around £2bn raised
so far.
Pension funds’ preferred instrument is likely
to be an ‘infrastructure bond’ that specifies returns with an
implicit public guarantee, rather than riskier equity-like
participation, according to the study.
The forecast explains: “Experience elsewhere
in Europe suggests that while bonds of 15- to 30-year maturity in
government-backed infrastructure projects are an attractive
proposition for life and pension funds, any equity element in
long-term infrastructure participation would entail a Solvency II
capital requirement that limits funds’ participation.”
According to the study, the desire to channel
institutional capital into infrastructure projects may persuade
governments to press for modification of Solvency II – perhaps
lowering the capital and liquidity requirements for pension funds
in view of the long-term nature of their obligations.
It adds that the UK government has a
particular incentive to seek modifications to Solvency II for
‘alternative assets’ by life and pension funds, as these are
already a relatively large component of portfolios because of
exposure to private equity and hedge funds.
However, the ITEM club warns: “There is
currently no sign that this will happen on a time scale that alters
the present Solvency II implementation requirements.”
It adds: “Larger UK-based businesses will be
able to offset this domestic pressure by expanding into
faster-growing overseas life markets, especially in Asia, Eastern
Europe and other emerging regions, and into pensions and non-life
business.
“But smaller, domestically focused life
insurers will remain under strong pressure to consolidate, through
merger or absorption, into larger general insurance or
bancassurance groups.”
Rising demand
The ITEM Club also expects the need for
employees and employers to increase retirement
provision will result in a rise in demand for
both life insurance and pension provision.
This will benefit providers of contractedout
management of employer-based schemes and administrators of personal
pensions.
The ITEM Club’s Outlook for Financial
Services is a companion to the main ITEM Club forecast
launched to examine the implications of ITEM Club’s
economic projections for the health of the UK financial
sector.
