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Outside Edge

This week, I found my interview notes from a consulting assignment in around 1990.

A very senior person, who cannot be named because I have not asked his permission to use the quote, described a life company as “five warring tribes who came by accident to inhabit the same reservation”.

Then I came across a pile of old articles about marketing.

The US railroads failed, said the academics, because they thought they were in the railroad business.

Had they realised that they were in the transportation business, they would have gone into airlines and prospered.

The quote about the warring tribes was – and is – a neat way of expressing what seems to me to be a truth. The modern life company may be blessed with many things but industrial logic is not one of them.

The actuarial, investment, sales, IT and customer service tribes arrived on the same reservation because life insurance developed in a particular way in a tax regime borrowed from Middle Earth.

So, if the life company is a historical and fiscal accident rather than a response to consumer demand, what business is it really in and does it have a future?

Most life companies are still in the risk business. Pay us the premium and on production of the necessary evidence that the contingent event has indeed occurred, we will pay what we said we would pay.

Unhappily, the entire personal protection sector is not all that big.

The dominant product lines of today&#39s life company are savings vehicles. The consumer is putting money aside to use later.

Whether the money is in a bond or a pension policy or an Isa is really neither here nor there.

The choice of vehicle or wrapper for the savings is driven by generations of fiscal promiscuity – successive Chancellors mucking about with the rules.

This, says Sandler, creates work for those of us involved in running the game but does nothing for the gate receipts or savings ratio. We should all be much more interested in asset allocation and stock selection. We should focus on the sweeties, not on the bag.

In fact, we already do just that. Third-party fund offerings and fund supermarkets have gone a long way to unbundling the products that were the engines of life company growth.

But to the extent that the life companies are still in the fund management business, there is a problem.

When industries globalise, they consolidate. Major league world players emerge, along with much smaller niche players. If you are too small to be a major league player and too big to be a niche player, you are, to use corporate finance language, toast.

The Watson Wyatt World 500 survey confirms that fund management is well down the consolidation road.

At the end of 2000, the top 20 controlled 38 per cent of the total assets managed by the 500.

That was up from 29 per cent in the first year of the survey. In 2000, the top 20 grew quite a lot. The next 30 grew a bit. The rest all got smaller.

Barclays Global Investors was the only Brit in the top 20. CGNU made it to 24, the Pru to 37, Standard Life to 76.

Royal & Sun Alliance sold out its fund management business from 91st spot. Short of yet more consolidation, it is hard to see how most of our insurers will find places at the global fund management table. Many insurers are already too big to be true niche players.

Some life companies will manage to reinvent themselves but the precedent of the American railroads is not encouraging. Do you take marmalade or honey?

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