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Analysts clash over life source

A City analyst has accused consultant Ned Cazalet of exaggerating the level of churning in financial services and argues that persistency problems lie primarily with life products rather than pensions.

The paper from analyst Fox-Pitt Kelton is entitled The DNA of Life and says market growth is real and not just churned business.

The claims fly in the face of a growing industry consensus over Cazalet Consulting’s Polly Put the Kettle On report. They also contradict FSA figures which demonstrate persistency worsening more in pensions, particularly regular-premium business.

The FPK report says growth in insurers’ reserves is a better indicator of companies’ health than new business growth and also an indication of higher persistency. It says reserves have grown by 8.8 per cent a year over the last decade, ahead of new business premium growth of 8 per cent a year.

Fox-Pitt Kelton analyst Mikir Shah says churn and persistency are problems more in the life sector rather than pensions and pension outflow as a percentage of reserves has remained steady at around 10 per cent between 2002 and 2005.

He describes churn as “the survival of the fittest”, with funds moving from poorer to better performers. Shah says: “We have produced our figures from FSA returns. The level of churning and persistency problems has been exaggerated.”

But Cazalet argues that the life industry has haemorrhaged £30bn over the last four years to acquire new business, resulting in a net decline of £15bn in earned premiums.

Cazalet says: “My statistics come from the life offices. This report overlooks the fact that claims are outstripping premiums and shows the type of thinking from analysts that the regulator and life offices have expressed concern about.”

Comment, p47

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