The predicted impact of the Government's stakeholder pension scheme on the
life insurance industry will, according to a Deutsche Bank report, be
“unprecedented polarisation”. Such a stark conclusion from City analysts so
early on in the game is certainly causing many sleepless nights for the
industry's chief executives who are desperate to ensure that their
companies remain on the winning side of the equation.
The Government's decision to cap the maximum charge on the stakeholder
pension at 1 per cent will have far reaching effects, driving down margins
on personal pensions as well. Life insurers will have to completely
re-evaluate the ways in which they conduct all their business,
restructuring their entire strategy.
The fortunes of the life insurance industry over the past year have been
mixed, with improvements in life expectancy and the prospect of continuing
low interest rates offering little respite. Perhaps most symptomatic of the
downturn was the decision by Scottish Widows chief executive Mike Ross to
surrender his company's 184 years of mutuality in a £7bn tie-up with Lloyds
TSB in June last year.
At that time, it was anticipated that other insurers would follow suit
and, while the take-up has not been as swift as some had anticipated,
NatWest's bid for Legal & General and the recent CGU bid for Norwich Union
have demonstrated that discussions are by no means over.
Consolidation is certainly one way in which the life insurers are
conscious that they can imp rove their prospects. Direct Line Life
Assurance managing director Duncan MacKechnie admits there is a
“fascination with size” and that stakeholder pensions are “driving the
Economies of scale and improvements in market share both ease pressure on
margins – the one thing that has to be achieved if stakeholder pensions are
to be sold at a profit.
City analysts predict that this trend will continue. Once one company
seals a deal, this immediately pressurises competitors to form alliances of
their own, which is why, after the Lloyds/ Widows tie-up, analysts forecast
a watershed. But finding the right partner and getting the right price are
For Legal & General, it became too complex and, with the collapse of the
NatWest/L&G merger, L&G chief executive David Prosser has made it known
that he is committed to an independent future unless he finds another
proposition that would be better for shareholders than growing the business
organically. This is a wise sentiment. Companies cannot be seen to be
relying on the appearance of a white knight to secure their future so the
life insurers are taking matters into their own hands, looking for ways to
innovate and grow their business independently.
Gary Muchmore, sales and marketing director at IMRglobal, remains
optimistic about the future of the industry. “Consolidation is not the only
strategy open to the insurers but they do need to have a clear strategy.
Business as usual is no longer an option,” he says.
As MacKechnie explains: “There are two main routes that companies
intending to sell stakeholder pensions can take – either they generate a
great deal of business, which can be achieved with mergers, or they become
as efficient as they can.”
Prudential has demonstrated that the future of the life insurer does not
have to be bleak and, despite moves by competitors to steal its market
share, it remains confident that it can weather the storm alone. In
preparation for the tighter margins that stakeholder will bring, the Pru
has taken the unpopular but necessary step of axing 4,000 jobs and pruning
its direct salesforce from 6,000 to less than 3,000 in two years. The
organisation knows the future of the company no longer resides in the hands
of the man from the Pru but with the customer.
Customers want choice and Prudential is certainly prepared to move with
the times – 45 per cent of Prudential's 1998 sales came from products it
did not have in 1995. This statistic sends a powerful message to the rest
of the industry. The Pru's 150 years of history have not impeded its desire
to innovate and Egg is a great testament to its vision.
As the nation becomes increasingly comfortable buying products online, the
e-opportunity for all industries, including the life insurance industry,
expands. Internet banking and internet broking are rapid growth areas and
there is no reason why, with the right product and service offering, life
insurers should not be able to take advantage of this revolution
themselves. Selling products online is the cost-cutting solution the
insurers are looking for because, as MacKechnie points out, “distribution
costs are the nub of the problem”. By offloading all administration on to
the customer, staff numbers can be reduced and the direct salesforce can be
reduced or removed.
Legal & General has recently shown its commitment to internet strategy
with a £30m budget to web-enable its entire portfolio. Cornhill is already
taking the self-service model a level further by launching an interactive
TV operation with Open this month offering life, home and pet insurance.
However, research carried out by Allfinanz demonstrates that the insurers
are far from fully e-enabled. Of the 68 large and medium-sized companies
questioned, 78 per cent are not currently using the internet to complete
the sale of life products directly to the customer. MacKechnie admits that,
even though Direct Line was the first to sell life insurance on the
internet, “the number of people who finally transact via this medium is
only 10 per cent of those who enquire”.
Nevertheless, the majority of life insurers plan to have the facility in
place over the next two years, demonstrating an understanding that internet
strategy will be essential if they are to sell low-cost products such as
Andy Miller, managing director of management consultancy Impact Plus, is
anxious that the life insurers should not hurry their internet operations.
He says: “E-commerce is outside their normal exp erience. Policyholders
expect their life insurers to be appropriately cautious. They cannot afford
to be wholly innovative with e-commerce as they are looking after our
By adopting the wait-and-see strategy, the life insurers may have been
criticised but, by having the benefit of others' experience, Miller hopes
they will find the right strategy and avoid careless use of their
Sceptics are also concerned that the scope of internet sales will be
limited as customers will never feel comfortable making long-term savings
commitments without advice. Nevertheless, Miller is swift to qualify this
point, saying: “I would not want to buy complex products without advice but
on simpler products price would remain the decisive factor.”
Muchmore does not believe that online service has to be an advice-free
service. “Advice does not have to mean meeting face to face. We will
increasingly see internet-based advice services becoming available. It is
just a matter of time before the public become comfortable using these
“The technology to support this transition is in place. Financial
advisers, for example, can now search a variety of suppliers to find the
best deal for a customer using an internet service such as Misys' m-link –
a claim that few other industries are able to make.”
Many customers would welcome the freedom this would bring, being able to
take the transaction at their own pace, in the comfort of their own home.
MacKechnie reinforces this notion as, in his experience, most Direct Line
customers use the website to get quotes and information before they speak
to an adviser.
Clerical Medical chief executive Robert Walther also feels that at present
internet operations are a supporting structure rather than a selling
mechanism. “Websites make face-to-face contact more efficient,” he says.
However, both MacKechnie and Walther feel that, within the next four to
five years, the role and use of the internet for the life insurers will
increase. What is certain, is that a decisive online transition by those
life assurers intent on selling the stakeholder product is essential and
that the window of opportunity is rapidly closing.
Low-cost products will challenge not only the channels used for
distribution but also life companies' entire customer service and marketing
Miller says: “If products become commoditi sed, and some will be,
companies will either have to accept their share or attach their commodity
product to things that are not commoditised, such as service and
Giving the customer choice in terms of distribution is important but
making customers feel they are valued and understood is the hot issue on
the boardroom agenda.
Customer relationship management (CRM) and customer value management (CVM)
and simply customer management (CM) are all buzzwords that are humming in
the ears of chief executives in all service industries. By knowing and
understanding your client, it is possible to provide a better, tailored
service – and in no industry is this more important than in the life
The policyholders of Legal & General, Prudential, Axa Sun Life et al will,
by the nature of their product, remain with them for quite a considerable
amount of time. Following clients through their lifecycle, analysing their
behaviour and offering them appropriate products at appropriate times in
their lives will undoubtedly add value both for client and company.
MacKechnie is not convinced that competition on the basis of price will
disappear altogether. “Companies will still compete within that 1 per cent
margin,” he says “but, for the most part, stakeholder pensions will be sold
Companies such as Scottish Widows, Prudential and Legal & General have
strong reputations and they will have to work to leverage those brand
profiles more effectively if they are to compete on stakeholder products.
The 1 per cent cap is going to leave little room for a weighty marketing
budget, which leads MacKechnie to the conclusion that it will be “a
considerable time before profits on stakeholder products are seen”.
The introduction of stakeholder pensions does not have to be a death knell
but there certainly needs to be a wake-up call for those companies that
intend to sell stakeholder.
Both Miller and MacKechnie agree that only the big companies with the big
brands are going to be able to compete in the stakeholder market. Big
offices can afford to make the investments in internet technology and will
certainly benefit from a first-mover advantage in the sector.
Not all companies are positioned to sell stakeholder pensions and
MacKechnie admits that Direct Line is thinking twice. Niche players should
concentrate on playing to their strengths and not risk their business with
Size, financial strength and confidence are going to be essential
prerequisites for stakeholder players which makes middle-market players
particularly vulnerable to takeover or destruction. Whether stakeholder
pensions will be workable and sustainable in practice has yet to be proved,
but one thing is certain, their introduction will be responsible for one of
the biggest industry shake-ups that life insurance companies have ever
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