View more on these topics

Riotous assembly

What value does a life insur-ance company bring? This is a question I find myself being asked increasingly by advisers, especially those that are moving their business model towards wrap.

These eight words, I believe, identify quite how much our industry has lost its way in the past two decades.

Having spent a considerable amount of time recently looking at several of the new challenges facing our industry, I have formed the conclusion that both insurers and advisers have forgotten what insurance companies do really well.

I believe there is still time to reverse this decline but it will take a major effort by all concerned to do so.

With the benefit of 20/20 hindsight, it is easy to see how we got into such a mess. Before identifying some steps to reverse this decline, I would like to offer my perspective on how we got here.

For a hundred years or more, until the final third of the last century, life insurers did a pretty good job of enabling consumers to protect themselves against the peaks and troughs of the investment market by providing products which smoothed out these risks but in the long term still provided worthwhile return.

In the 1960s via Abbey Life and again in the 70s with Hambro Life, one man, Mark Weinberg, led a revolution in this country’s financial services industry.

Recognising the desire for instant gratification and demand for immediate results that has typified the baby boomer generation, he marketed unitised products that were far more transparent than traditional with-profits.

Consequently, by the advent of regulation in 1987, virtually every traditional life office was offering unit-linked investment products as well as more traditional products arrangements.

Weinberg, of course, also played a significant role in the design of the 1987 regulation and its implementation.

From my perspective, things started to go seriously wrong after the crash of 87. Aggressive sales competition with unit-linked products over a number of years had led to a situation where life offices’ business flows were massively influenced by the level of their bonus declarations. The ranking achieved in Money Management’s with-profits survey could mean the difference between achieving sales targets and slipping into obscurity.

Against this background, when insurers should at the very least have been significantly reducing terminal bonuses, they became embroiled in a game of chicken, where no one wanted to be the first to blink. For several years, insurers continued to pay more in bonuses than the funds could afford, until the compound effect on solvency meant action was no longer avoidable.

Just as investment markets were beginning to perform well, so insurers were forced to make swingeing cuts to bonus rates. And so the covenant with consumers was broken. Policies which advisers recommended on the basis that they would smooth out risk, that is, insure against an adverse financial market, failed to deliver on this promise.

At this point the error was compounded when insurers, desperate to detract from their own poor performance, identified that by offering third-party funds, a practice previous only really embraced by Skandia, they could offer investment performance that looked far more attractive to their own.

This in turn has led to a situation where many life and pension products are little more than assembly lines that bring together a wide range of investment funds.

If life companies choose to focus their efforts on the assembly process, they are inevitably going to be subject to ever greater competition from new entrants, without the historic legacy and associated expenses, looking to provide a similar service at lower cost. What seems to have become lost along the way is that the primary role of an insurance company should be to manage risk.

Just as people are increasingly beginning to sound the death knell for UK life insurers, even the mighty Standard Life no longer wants to be thought of as an insurance company so an increasing number of insurers are introducing products built around providing guarantees rather than seeking aggressive fund growth. These products are primarily targeted towards the at retirement market.

Helping the baby boomers accumulate assets has been the main role of the IFA community in the past 30 years. As they start reaching retirement, it is clear that helping them optimise their income and protect their capital in retirement will become a valuable service advisers can provide as well as a lucrative one.

I have spent a lot of time recently looking at how the advice process needs to evolve to account for these new products and how to help advisers evaluate them. Many advisers seem to see the cost of the guarantees provided by such products as part of the annual management charges and then suggest the products are expensive but surely a guarantee serves a very different purpose. It is protecting consumers against the downside.

Is not insurance about protecting people? Not just their lives but their investments too? People insure their cars, they insure their houses and their lives. Why then would they not want to insure the value of their investments?

Since the advent of unit linking, our market has become obsessed by charges and performance. To me, this is like choosing price over value. Do an adviser’s clients shop for food at Iceland or KwikSave or do they shop at Waitrose and Marks & Spencer? If it is the latter, they are showing they make value judgements. Should we not be helping them do this with their investments?

Historically, advisers have moved clients into more conservative investments in the years approaching retirement. With increasing life expectancy, a male retiring at 65 now has a 50 per cent chance of reaching 92. It could be argued that these changes in investment profile need to be delayed and if guarantees can underpin the financial performance of funds, could this not allow a far more aggressive investment strategy much later in life? In this case, ought not different criteria to be applied to measuring the value of the guarantee?

One way to address this issue may already be to hand. Advisers now increasingly use “attitude to risk” software. For clients with more conservative tastes, these recommend more cautious investments.

If such systems are identifying an aversion to risk, should they recommend guarantees rather than constrained funds? Software suppliers will need time to look into these issues but in the interim if the software identifies cautious custo-mers might advisers simply change the products they are recommending?

After 40 years of life offices stressing the importance of fund performance, it is hardly surprising that the adviser community is focused on this. However, with an increasingly ageing population, provided insurers can genuinely revert to their core skills of risk management, it looks to me like it is time for them to change their message and to deliver the support services to reinforce this.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm