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Chris Gilchrist: Tragedy of the Life Office – the final act


During Act Two of the life company tragedy, established lifecos suffered a double whammy. While inflation was eating their working class industrial branch lunch, upstart unit-linked life companies were eating their middle-class dinner.

These direct sell ulicos – Hambro Life, Abbey Life and a wave of others – had plans and business models designed not by actuaries but by accountants, and they built highly motivated sales forces. Essentially, they sold investment plans masquerading as life insurance in order to collect tax relief on premiums. This was an excellent wheeze that lasted until the relief was abolished in 1984.

When they adopted ulicos’ methods and plans in the early 1980s, established life cos abandoned their values and, effectively, their social utility.

Squandering money by buying estate agencies at inflated values in the 1980s (hundreds of millions were written off within a few years) made them look like patsies. When many members of the House of Lords who had previously acted as a vigorous lifeco lobby were ruined by the collapse of Equitable Life in 2000, life cos were friendless.

Lifecos could not sell pensions or endowment policies after 2000. They were not selling much pure life insurance. They decided to benefit from the surge in lump-sum investment by the baby boomer generation by packaging the with-profits policy as such.

This was a terrible idea managements should have scotched at birth. Back in the 1970s, a candid life co actuary told me the real secret of with-profits investing:

“We have a big hose delivering a steady flow of money. All we have to do is point it at the better performing asset class. And if we do not know what that is, we just point it at a cash pile until we do know.”

This model will deliver a reliable bonus stream but only if there is steady cash flow.  With lump sum investments, you have to expose policyholders to larger investment risks. Few questioned what it said on the tin, though, and with-profits bonds sold like hot cakes in the noughties, wiping the floor with unit-linked bonds.

But nemesis was closing in. A dozy Department of Trade had never taken life co regulation seriously, as the Equitable collapse proved. The FSA had to do better. Its investigations showed that life cos held far less free capital than they thought. New EU rules compounded the problem. The net effect was that in the bear market of 2007/2008 life cos had to slash the equity allocation of with-profits funds.

For many, there was no way back: equity allocations at under 25 per cent meant all investors would have done well to cash in and reinvest. Except that, if they did, they incurred hefty penalties. Zombified life cos were consolidated by financial engineers, with predictably blood-spattered results for policyholders.

The real tragedy is that, despite this long sequence of terrible decisions, all of which placed life cos’ interests ahead of those of policyholders, their managements still believe they are good businesses. Now they have sold their shareholders the idea they can make good returns by running wrap accounts. But once wraps move to fixed rather than basis points charges, this will be exposed as another life co myth. Lifecos are not frogs transformed into handsome princes by kissing wrap princesses. They are overweight clerks thinking they look good in short skirts and fishnet tights. Their nemesis awaits in the form of Big Data.

Chris Gilchrist is director of Fiveways Financial Planning, a contributing author to Taxbriefs Advantage and edits the IRS Report



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There are 9 comments at the moment, we would love to hear your opinion too.

  1. “They are overweight clerks thinking they look good in short skirts and fishnet tights.”

    It was worth reading to the end just for that!

    I blame Churchill. As I understand it, it was he who was the driver behind tax relief on life assurance premiums at a time when conventional savings and investments were heavily taxed. The rest is history.

  2. The final act?

    From the OBR’s notes on the Autumn Statement:

    The OBR forecast a rise in unsecured lending, including credit card debt and bank overdrafts, by £360bn over the next five years.

    They also show household mortgage borrowing over the next 5 years rising by around £580bn.

    Together that borrowing will take total household debt to £2.6 trillion by 2020.

    So, a thought in passing, might that market produce a need for life assurance?

    Maybe all it needs is something as simple as a Life Assurer.


  3. Cassy is a naughty girl, she told me the first life office was made up of one man who took money in return for paying out when somebody died, he was making a tidy profit even when people were dying young but when health improved during the industrial revolution he noticed they were living longer so his profits soared. He wondered what he could to with the profits and came up with a “with profits” fund, interesting concept?

  4. ^

    Sounds just like an equitable life, Henry!

  5. Maybe I’m being thick. But how is Big Data going kill the Life Co?

  6. I am not sure that Big Data will act as Chris Gilchrist suggests, but be that as it may, there is no doubt Big Data and its uses is here.

    Aviva, for example, has experimented with selectively replacing costly and inconvenient medical exams with predictive modeling of risk based on enhanced data. A study of 60,000 Aviva applicants found that nontraditional data was as effective in identifying potential health risks as blood and urine tests.

    That is an extract from a pieced of very interesting research by the Boston Consulting Group – link below. Well worth reading for their analysis of how Big Data may be, and is being used.

  7. Cassandra is still on the ball I see.

    Would it be possible for National Insurance to cover death, illness and disability? State Lifeco, what would it be called? Empty Nest?

  8. Was there actually any point to this awful trilogy !

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