How can the life offices make sure that they stay part of the distribution chain?
Anybody who has had any experience of strategy planning has heard the story about how the US railroads went bust because they believed they were in the railroad business when in fact they were in the transportation business.
This ancient and apocryphal story came to mind when Money Marketing asked me to write this week about “How can life offices make sure they stay part of the distribution chain?”
The twist in the story here is that most life insurance companies have long ago lost track of what business they are in.
Most of them got rid of their advisers years ago, almost without exception their investment management operations were hived off into separate subsidiaries and now the single most labour-intensive part of what they do – the ironically named “customer service” – is either outsourced or being dispatched out to the sub-continent like a younger son of the Victorian era for whom no clear purpose in life has been identified.
I am also reminded that a couple of months ago I put together a presentation for a bunch of management consultants which was entitled: “The only people who make money out of distribution are advice-givers.”
The core proposition was that the ownership of distribution is invariably loss-making because it is individual advisers who are the scarce resource and they drive up the share of the distribution cake they receive. When one proprietor has been driven out of business, advisers happily move along to the next one.
No space here, I'm afraid, to provide the evidence to support that contention but believe me there is lots of it.
What then are the unique propositions that a life insurance company brings to the market? In what way are life companies able to add value for customers and distribution that gives them a sustainable competitive advantage?
I can only think of two things that are specific to a life company – smoothing of investment returns and risk-taking.
The combination of stockmarket volatility and the reluctance of the actuarial profession to acknowledge the need to reform with-profits has ruined a first-class brand proposition to the point that it is now almost unsellable.
Risk remains a USP for life insurers but it certainly will not support on its own the expensive management edifices that have been created.
However, if a distributor the size of Misys decides at some stage to treat directly with reinsurers, then another huge swathe of the life insurers' market may well disappear.
It is also true that some well informed commentators find themselves deeply worried at the headlong rush into annuity business by some product providers at a time when longevity seems set to continue to increase and the quality of the assets backing those liabilities deteriorates as product providers strive to increase yields.
At the macro-economic level, a key purpose of life insurance companies has been to aggregate the savings of lots of small investors so that capital could be directed to industry and commerce for investment.
That bit worked pretty well for over a century until a combination of misguided regulators, over-zealous consumerists and short-sighted Governments made it uneconomic for the industry to fulfil that purpose for the mass market.
Prudential is busy re-inventing that mission out in the Far East where governments understand clearly the importance of this macro-economic role at the current stage of development of their economies. How many thousands of agents has Prudential recruited in Beijing and Guandong?
So what is the role of the institutions formerly known as life insurance companies in the distribution chain?
The brutal answer may be that there isn't one.
As the Sandler suite of products becomes available, the banks will move to dominate the middle market and will squeeze life insurance company margins such that the business becomes uneconomic.
Without smoothing, insurance life companies add very little value. With appalling customer service, they actually become a liability.
Bancassurers will quickly come to realise that by treating directly with Marlborough Stirling and other outsourcers, they have direct control over service standards without wading though the treacle of multi-layered life insurance company management hierarchies.
As the IFA community focuses itself increasingly up market, the key “product providers” will not be major life companies. Investment houses, wrap propositions, trading platforms, Sipp providers, networks and a host of other participants will disaggregate what we currently call products and because technology is second nature to these folks, they will happily work on the wafer-thin margins that life insurance companies cannot countenance.
Prudential has the right idea – close down UK retail operations and invest their capital where they can make a decent return on it.
Peking Duck anyone?
Tony Kempster is a business consultant (email@example.com)