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Larger than life

The predicted impact of the Government&#39s 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&#39s chief executives who are desperate to ensure that their

companies remain on the winning side of the equation.

The Government&#39s 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&#39s 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&#39s 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

complex issues.

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&#39s 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&#39s 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

stakeholder profitably.

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&#39 experience, Miller hopes

they will find the right strategy and avoid careless use of their

policyholders&#39 investments.

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&#39 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&#39 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

on brand.”

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


The Institute of Economic Affairs Conference, being held on May 15-16 at

Le Meridien in London


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