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Variable annuities set to shake up life office sector

Life offices that are early entrants to the variable annuity market could be the big winners,m with late entrants losing out, says Fitch Ratings.

Senior director of insurance David Prowse says the list of the top 10 life offices could look very different in future years as insurers that take the biggest slice of the baby boom generation approaching retirement become dominant players, securing a disproportionately high share of the market.

Aegon, which is already in this market, and Axa, which is working on launching third-way products soon, are the two companies he sees as benefiting from early entry.

Prowse says: “It could well be that something like variable annuities is tomorrow’s product, in which case, the companies that are in there first could become the winners and the others the losers.

“Strangely, variable annuities might be a kind of replacement for with-profits in that it has guaranteed elements but also more flexible elements as well. “

He says traditional annuities have had a near-monopoly in the retirement product space but this will no longer be the case in the near future.

He says: “Within traditional annuities, there will be much more differentiation between types of customer and pricing will be more sophisticated. Enhanced annuities for medical conditions will become much more publicised and companies who are left with the healthy people will have the risk of people living forever and that will cost them.”

In this summer’s interim results, Prowse expects to see life offices reporting a drop in protection business as it is largely driven by the housing market.

Between October and January, Prowse believes that there may be a mini-boom in money going into Sipps as cash under protected rights will be allowed to be invested from this point.

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