New life sales in the UK are likely to dip over 2013 and 2014 as the market readjusts after the introduction of the Retail Distribution Review (RDR), according to Standard & Poor’s Ratings Services.
The ratings agency says key areas of uncertainty include how pricing will change as a result of the removal of commission and whether consumers will make the shift to paying upfront for advice.
It also expects sales of corporate pensions to be hit especially hard as smaller schemes will now be required to pay fees for advice under the RDR.
The Retail Distribution Review (RDR) – due to be implemented on 31 December 2012 – will change how products are sold, preventing insurers from paying commission to intermediaries on retail investment products.
This clampdown on commission matters because historically, Standard & Poor’s (S&P) says most UK-based independent financial advisors (IFAs) have used a commission-based business model for financial advice.
The ratings agency said the IFA market was responsible for 78% of annual premium equivalent (APE) sales in 2011.
Most of the life insurers based in the UK that are rated by S&P have little overseas diversification, according to the ratings agency.
It therefore says these companies are therefore likely to see their future volumes subject to uncertainty from 31 December 2012, when RDR comes into effect.
The immediate regulatory changes insurers in the UK must adjust to are:
- Auto-enrolment, which ensures that employees are automatically enrolled into a company pension scheme, which started to come into effect from October 2012 for the largest employers.
- Gender-neutral pricing will prevent insurers from underwriting on the basis of gender. It will be implemented on 21 Dec 201
- The UK Financial Services Authority’s Retail Distribution Review (RDR), which will change how products are sold, preventing insurers from paying commission to intermediaries on retail investment products. It will be implemented on 31 Dec 2012.
- The change in regulatory authorities as the Prudential Regulation Authority and the Financial Conduct Authority assume their powers in early 2013
Shift in product mix
Standard & Poor’s said it expects the sale of protection products to account for a greater share of APE in the post-RDR environment as the IFA community seeks to maintain income from sales.
This must be seen in the context that pure protection business will be out of scope of RDR in the UK.
Overall, S&P says: "The combination of low interest rates and regulatory change offers the UK life sector a heady mix of threats and opportunities. We anticipate that in 2013 we will start to gain clarity on a number of areas which are presently uncertain."
The ratings agency expects those insurers that enter 2013 with a broad distribution base that is not reliant on commission to do best.
"In addition, those that have access to the market via a number of routes or whose customers have already made the cultural transition to paying for their advice will likely gain most from the changes under RDR.
"The insurers that can extract value from auto-enrolment will be those that are able to retain and select schemes without weakening their profitability and those that can exploit the opportunity to sell a broader suite of benefits.
"In our opinion, an insurer will need to execute this strategy efficiently, without weakening the balance sheet, if it is to maintain or enhance its credit strength," said the report.