2003, despite the brave faces, has been an exceedingly difficult year.
At the bottom of the whole problem is the fact that the traditional products supplied by life companies have become commoditised and loved even less than their historic approval factor.
Endowment mortgages, one of the staples of the industry, are no longer saleable. With-profits bonds – rest in peace. Unit-linked – well, they went down with the stockmarket. Pensions, well perhaps a few stakeholders but who makes money out of those?
If you can find a newspaper today that does not have an adverse comment about pensions in it you must have caught a newspaper on an off day.
This left protection and annuities where the rates are directly comparable and purely rate-driven. The mystique has gone.
People buy cheap term insurance and invest outside of pensions and endowments purely for the flexibility and accessibility and shun other products.
I compare the life insurance business today with IBM a dozen years ago. IBM was then an acronym for In a Bloody Mess. Mainframe computers became unnecessary and the thing that IBM had invented, the PC, was able to be built in any back-street factory in Taiwan but IBM was not destroyed. It has risen from the ashes as a management consultancy firm and a great one too. It no longer sells boxes, it sells systems.
I believe that the way forward for life companies is to study the trials and tribulations and eventual re-emergence of Big Blue.
One or two life companies will have a great business in corporate pensions but they will continue to see less use of their traditional services and products as the increasing sophistication of the inv-estor causes them to shun the life insurance wrap.
To survive, life companies must become management consultants to the teams of excellent salespeople who represent the IFA marketplace.
Sadly, IFAs tend to be excellent at one thing – communicating with and selling product to their clients (before you write, yes there are exceptions). They are rarely businesspeople or administrators and have never had the ability to service clients.
It is impossible to give a client a valuation of a life insurance product without seeking a price directly from the life company.
IFAs' remuneration structure has been based on a wham bam, thank you ma'am basis whereby all the income was paid up front rather than on the drip like the life companies took their income.
Whether brokers can change their business model is dubious. Unfortunately, IFAs have to pay their consultants in the same way as they have always paid them and cannot afford to receive their remuneration from their product suppliers on a different basis.
When national brokerages keep going back to the life companies for more handouts – £2m here, £5m there and £10m occasionally – this is pure firefighting.
It is not £5m that these brokerages need – it is £100m. They require enough money to tie them over remunerating their salesforces while they change their own earnings' structure to coincide with their product providers, that is, quality ongoing earnings.
Life companies today ought to be dealing with the IFAs who are really willing and keen to become well-rounded businesspeople and who are prepared to tighten their belts in the short term to change their business model into one where they earn based on the amount invested through them (fund-based) rather than an estimate of how much the client will regularly invest in the future (indemnity).
Life companies should run the back office for these ambitious keen brokers help them with their public relations with their marketing with their office systems, internal reporting, recruitment and accounting.
Just producing a wrap will be only a small proportion of what is required. In any case, one wrap will look pretty much like another and, in fact, wraps will become just as commoditised as all other products.
Life companies that manage to crack running the back office for brokers (and there can't be many of them because many life companies can't run their own back offices) will be the ones that rise from the ashes like the phoenix and IBM.
Unfortunately, there is a sad sting in the tail of this story. I was interested to note that when the industry's statisticians produce league tables of the pecking order of brokers in the UK that the 100th biggest has a turnover not dissimilar to a good pub.
Life companies today have nothing better than commoditised products and are relying on their business from what in the main is purely a cottage industry. If they are looking worried, it is hardly surprising.
Peter Hargreaves is chief executive of Hargreaves Lansdown. This article is extracted from a presentation he made in autumn 2003 to local life insurance branch managers in Bristol