MGM Advantage chief executive Chris Evans is predicting that other mutuals will follow the company’s lead and launch flexible annuity products.
Evans says the mutual sector is facing “a big threat” as with-profits business continues to run off in the UK.
He says: “The FSA takes the very clear view that the capital within each mutual belongs to its with-profits policyholders. This is quite difficult for mutuals because if they want to grow their business, they have to give a return back to with-profits policyholders. But with-profits policies are not very popular these days, so mutuals feel cornered because they need either to sell with-profits or close to new business or find some other way out.”
Evans says MGM has found another way out. He says its flexible income annuity, laun-ched in February, is set to revitalise the entire mutual sector.
He says the firm carried out a lot of research and found that consumers want investment return on their annuity, which normally goes to the insurance company. MGM’s product is asset-backed, enabling customers to benefit from the growth in real assets backing the liability.
But investors also get a share in the profits that the comp-any builds up.
Evans says: “Given that people do not like with-profits, we tried to find a way to reinvent mutuality. This is arguably the biggest change in the industry for mutuals for decades. We invented a product where you can be a member and share in the profits of the society but you can invest in a range of top-quality investment funds and not with-profits. These customers get whatever return those funds achieve – there is no smoothing, no market value reductions and no bonuses.”
But the launch was delayed as the firm tried to convince the FSA of the merits of the plan. Evans says MGM was never in any doubt that the product conveys membership and creates the consumer benefit it was looking for. But if the product had not been given the green light, it is likely that MGM would have been forced to close to new business.
Evans says: “We had a long debate with the FSA over whe-ther this could work. That contributed significantly to the delay of the launch. They nee-ded to be clear that the interests of the current with-profits holders were being looked after and that the new policyholders were genuinely going to benefit from the profits of the society. For the FSA to have supported us on this is massive. When they signed off our new product construct, they were effectively enabling a new way for mutuals to write business.
“We did a huge amount of research, so we were very clear on the consumer need. We were determined to find a way to meet that need and give the profits back to customers. It would have been really hard for the FSA not to agree but it took a very long time for both parties to go through the minutiae. If they did not, we would have had to look at other options such as closing to new business. We work for our members and therefore if we do not have members, you have no reason to generate value.”
Evans says other mutuals will follow MGM’s lead. He also believes that the change will prompt a flurry of consolidation in the sector but insists that MGM will not be a “victim”.
He says: “We had record sales last year and we have a solution which is genuinely innovative and so we will not be victims of the looming consolidation in the sector. If there is value for our members in merging or acquiring another mutual, we will do it.
“The management teams of all mutuals face the same responsibilities so they have to be thinking about this. We have a list of companies we think we have synergies with and we are in talks with them at the moment.”