oliver, wyman & Co believes consolidation in the life and pensions industry will be rapid
A flight to quality, rather than pressure on solvency margins, will be the main driver of rapid consolidation in the life and pensions industry over the next five years.
According to Andrew Rear, senior manager, insurance, at financial consultants Oliver, Wyman & Co, concerns over the financial strength and staying power of providers will cause many consumers and intermediaries to gravitate to perceived high-quality, trusted brands. That will concentrate the life industry around a handful of powerful companies.
The pace of consolidation will accelerate, with the top five players increasing their market share of new business from around 50% currently to around 70% over the next five years, he predicted, although there is likely to be change among the membership of the top five.
The most successful companies will focus on building brand profile and customer service. Companies currently lying outside the top five will have to buy distribution, either literally, as is happening now with product providers such as Scottish Equitable buying into intermediary firms, or by hiking commissions and letting margins drop.
'Two sorts of buying are occurring,' Rear said, 'defensive buying from the premier league of companies and the first division players who are being forced to buy distribution to keep up.
'Raising commissions and lowering margins, the two other options open to the first division players, is also happening but this is only ever a short-term solution. It means you get to the stage where you aren't making any money. Look at stakeholder business. I can't see how more than two or three providers are making any profit.'
Companies that intelligently reassess their product mix are also likely to be more successful. Those that change to become vertically integrated with elements in all aspects of the market rather than simply remaining intermediary product providers are better bets, he said.
Those that have bought into intermediary businesses are likely to keep these firms separately branded after depolarisation, Rear believes. This is similar to the situation in Australia and the Netherlands, which already have depolarised markets.
In these markets, multi-tied intermediaries sell products from three or four providers, one of which is the parent company, which receives 20%-30% of the business. This guarantees a market for the parent company and the intermediary generates additional revenue.
As for the products themselves, with-profits and those with guarantees are likely to be more successful for the foreseeable future, according to Rear.
He said: 'The market in the 1990s was all about 'my fund is better than your fund,' but now people are more likely to be looking for guarantees or secure products such as with- profits, given the market performance of late.'
The continuing shift in demographics will also play a part in forcing guaranteed products up the agenda, Rear noted.
'Baby boomers are coming up to retirement and they will be thinking more about security rather than growth for their money,' he said.
This tendency again favours the larger companies as products such as capital-guaranteed investments or with-profits bonds require a strong financial base to back up the guarantees.
'These products require substantially more capital backing than unit-linked products,' he said. 'A number of companies may have to choose between offering consumers what they want and achieving ambitious growth goals.'
'VCTs and EIS compared' panel
Letter to Women and Equalities Committee
Decumulation panel debate
'Third of market could go'