AKG’s Matt Ward examines the way the life insurance space has evolved in recent years...
KG’s core work sees us carrying out independent financial strength assessments for companies across four sectors – provider, offshore, platform and DFM. The provider sector, which includes life insurance companies, is AKG’s longest standing sector at more than 20 years. For companies operating here, it has been a sector that has been through great change and challenges during those years.
THE WAY THINGS WERE
There was a time when the shorthand understanding of how the financial services industry operated was that financial advisers sold products, which came from a basket of insurance and investment offerings, proffered by any one of a number of big life insurance companies.
Notwithstanding some who only participated in certain aspects, typically these companies had a whole range of products from protection to savings and investment; a spectrum that came to be labelled as the ‘Waterfront’.
The insurers themselves were a mix of mutual and proprietary companies and operated different classes of business: with-profits, unit-linked and non-profit, with product variants thereof.
Many were hundreds of years old and, while there had certainly been innovation in those years, many aspects had largely stayed the same.
Effectively, these companies competed among themselves as a simple UK life insurance peer group. Some doing well in one or more product area and less well in others, with some ebb and flow and essentially a degree of cross-subsidy year to year.
THE EVOLUTION OF THE SECTOR
The forces that have caused the changes and challenges are several, but can be broadly summarised at a high level as follows:
- The old model, which saw a merry-go-round in some products of cases of the same money, just could not keep going
- Cost pressure bearing down on often flabby business models.
- Mounting opportunities to innovate both in the marketplace and behind the scenes in terms of administration
- The threat from others to use technology to enter the market, and/or grow more effectively
- Reduce the barrier to entry size that had existed and protected incumbents for decades or more.
- Customer behaviours and demand
- Linked to technology but more widely, a wake-up call across the market about the customer and the requirement to put their needs at the heart of activity, as well as treating them more fairly.
- Regulation and legislation
- Linked to all of the other factors, this has in itself been a key environmental source of change, both in terms of product and distribution as well as the capital requirements of participants, which has affected appetite.
These forces and others have combined to change the sector, and do so significantly, with both exits, combinations and new entrants.
What once was the preserve of a relatively static group of large life insurance companies, has become a diverse range of company types with differing business focuses and product lines.
CONTINUED RESEARCH ANDDUE DILIGENCE
It is therefore important for advisers and paraplanners to keep close to developments in this sector and the changing profile of the companies operating within it.
For example, intermediary businesses might be considering product/proposition research and panel construction exercises, which are designed to select business partners in areas including:
- Individual protection products,including critical illness
- Group protection products
- Individual pension products, including SIPP
- Bulk buy-out, buy-in
This should be an equally important task when considering selection of products/propositions and business partners in relation to new business as it is to considering existing business approaches.
Given the sheer amount of M&A and book acquisition deals seen in this provider sector, advisers and paraplanners are bound to be dealing with customers whose product/fundhas been impacted by such activity.
Advisers and paraplanners thereforeneed to keep abreast of how these deals manifest themselves and how they progress in time. Part of this process may inevitably include due consideration of whether they wish to retain a relationship and hence customer business with said company or companies.
When considering how best to carry out research, due diligence and panel construction exercises, advisers and paraplanners should consider the applicable product line under consideration and then seek to create a relevant sub-peer group of propositions and companies for comparison purposes.
This should include due consideration of the financial strength of companies as a component part of a robust exercise. Advisers will need to set tolerance levels for the financial strength of companies under consideration within the relevant peer group.
Advisers should also ensure that they compare like for like in areas where there is company overlap between propositions. For example, a platform operator may offer an in-house SIPP product but in such cases the adviser should consider the financial strength and sustainability of the specific entity that offers the SIPP, and also measure this against the relevant peer group of companies within the provider sector.
PLUS ÇA CHANGE...
Undoubtedly then, there has been change and the world in which life insurance companies now operate is a different one to that of past decades.
And this change is set to continue.
What has not changed, however, for advisers, is the need to continually consider the market environment, understand its dynamics and constituents and then apply robust ongoing processes for selection
Matt Ward is communications director at AKG Financial Analytics