Insurance companies are concerned their non-IFA distribution partnerships are failing to meet their full potential because they are taking an unfocused and unplanned approach, according to research by Watson Wyatt.
Distribution arrangements with high-street retailers, utilities companies, employers, unions and other affinity groups may work well for wine clubs but are they viable for financial services products?
While most insurers and product providers believe these distribution arrangements have excellent potential, Watson Wyatt's research uncovers a high level of dissatisfaction about how such arrangements are currently working. The strength of these partnerships is to be put to the test with the introduction of stakeholder in April.
Life companies and their partners will need to consider the Watson Wyatt research in conjunction with another study published last week by Cap Gemini Ernst & Young.
The CGEY study says high-street banks will ultimately control the distribution of life insurance products if polarisation is scrapped. Their strong bargaining position will mean banks will have a strong influence over the shape of their relationships with life offices.
But life offices are looking at a variety of other forms of partnership.
Whoever they link up with, the success of such arrangements depends on the commitment of both parties to the project. The Watson Wyatt research shows insurers have found problems related to customer service, compliance, low margins and operational and technological difficulties in adapting to the needs of individual distributors.
Watson Wyatt senior consultant Frank Fletcher says: “The providers of financial products are usually more keen to offer their existing products in an unfocused fashion through whatever arrangements they can establish than build specific customer needs-based solutions. This is unlikely to create the best business results.”
The research found insurers and other product providers see most potential for savings and investment through partnerships with high-tech and communications organisations. They also see potential for growth in the areas of loan protection through retail organisations, savings and investments through banks and building societies, and life insurance and pensions via employer-based organisations.
But Syndaxi Financial Planning director Robert Reid says: “There is a great overplay in affinity. A lot of affinity group managers want to hang on to as many partners as they can and insurance products are just tagged on to a long list.
“Glasgow Rangers has fiddled with financial services partnerships for years. It has had four or five deals and has struggled to find one that works. For partnerships to work, you need a strong relationship and commonality of purpose.”
For a successful and sustainable partnership to work, the Watson Wyatt research shows the senior management teams must commit their organisations whole-heartedly and expectations need to be matched.
Fletcher says: “The distributors themselves are hoping for a degree of tailoring of products that providers have not given. Whether providers can do this depends on the volume of business. People are constantly highlighting reservations with partnerships like this but a lot of business can be done through the partnership channel and this will grow as the cost of face-to-face selling means it is disappearing.
“This does not mean IFAs are disenfranchised but they should see partnerships as an opportunity for themselves. Many IFAs were disappointed at Standard Life getting the Post Office deal for stakeholder pensions but that could have been won by an IFA group.”
Watson Wyatt ran seminars last week with some of the insurance companies which participated in its research. Feedback showed a confidence that a best of breed niche product can be marketed successfully through partnerships.
Whether stakeholder fits into this category remains to be seen but it does have the advantage of being a simple new product which will be launched with a fanfare.
Actuarial consultantcy Bacon & Woodrow associate Icki Iqbal says:
“Non-traditional distributors have a different mindset to life insurance companies, causing a mismatch. But the companies that are coming out winners are the ones that do one thing well. Legal & General is tying up banks specifically for stakeholder. For a single product, that can work well.”
Because of the critical mass of clients required to make stakeholder work, providers will have to develop their distribution partnerships and make them work.
Iqbal says: “This bodes well for the four or five who really focus on stakeholder. About 30 companies are registered to sell stakeholder but they cannot all be successful. To succeed, companies need slick administration and a mind focused on stakeholder distribution.”
L&G managing director of direct distribution Matt Hotson says: “People not in the industry think stakeholder is an opportunity to make lots of money.
There are a lot of unrealistic expectations in the affinity group market and a lot of people who want to do deals.
“The trick is finding a way to build partnerships which are recyclable, where you can build the same capability many times over. On the internet, we are offering thriving content syndication – products that can be easily sold on other people's websites. This proposition is attractive to IFAs.
“For deals of the size of our partnerships with Barclays and Alliance & Leicester, you will always need bespoke solutions. There are obviously issues around compliance but these can be minimised by setting up the partnership right at the beginning. We go live on April 6 and everything is on schedule.”
Standard Life's deal with the Post Office will give it access to 28 million customers and 18,000 outlets. This is Standard's first major distribution partnership deal and, with stakeholder's tight profit margins, making the partnership work is crucial.
Standard Life assistant general manager for marketing Graham Storrie says:
“We know we have to be more efficient in the tight profit environment. But, unlike other distribution partnerships, this is a highly focused deal on a specific single product.”