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Model army

Recent comment has suggested that the life insurance industry’s business model is broken. Apparently, nothing short of closing to new business can save it.

Such commentary ignores the huge restructuring that the industry has already undergone and this will continue apace following the retail distribution review.

The old model is indeed ending. High levels of commission mixed with low annual management charges created an unsustainable profitability cocktail, particularly for regular- premium contracts such as group pensions.

At Standard Life, the beginning of the end of the old model started five years ago. Our new business operation no longer requires the same levels of capital as it did a few years ago.

Capital-lite products such as our Sipp and our recently launched tailored investment bond are leading the way towards a more transparent and sustainable future. In a nutshell, our new business model and that of some other insurers has evolved towards an asset-managing approach, where expenses are more closely aligned to income.

In fact, this model is remarkably similar to the fund platform model adopted by some distributors in recent years. We have effectively been closing in on a similar target but from different starting points.

The RDR will complete this evolution and, even those insurers who have been slower to price their products at the factory gate will begin to change sooner rather than later.

While the new model instils good financial discipline among insurers, customers and advisers will also benefit from the changes taking place. Customers will see that they are buying two services rather than one product, each with its own price and value.

Advisers will also benefit by moving to a more sustainable financial model that does not require the continued sale of products to new customers every year. Some advisers may regard the transparent agreement of advice costs with a degree of trepidation at this stage but remember that independent advice has not only survived previous change but also thrived on it.

There is little to suggest that things will be different this time. The huge value that advisers add will always be something worth paying for.

So where does the future lie for insurers?

Certainly, there will be more competition – from fund supermarkets, from Sipp administrators and wrap among others. Insurers’ experience in systems and process development and the strength of their brands, should stand them in good stead.

But the Sipp market should also act as a lesson here that excellent service is a pre-requisite for success. The successful players are not always the household names.

In this battle to succeed, insurers can also do something that most of their competitors cannot – they can insure people’s health and longevity.

Combined with new transparent and desirable services, this could yet prove a potent force capable of winning the hearts and minds of customers and advisers.

Jackie Hunt is deputy group finance director at Standard Life

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