Dave Ferguson of the Abacus, says life offices should be looking to riskier markets in order to rebuild their margins going forward
While the gradual and accelerating disintermediation of the life industry in respect of asset accumulation products shows no sign of abating, it is perhaps unsurprising that some offices are seeking new ways to maintain business volumes, and crucially, retain margin.
In a sector that has largely focused on business volumes rather than the profitability that is contained within the old actuarial box of tricks (what would you like the answer to be?) it has taken a threat to volumes to cause serious questions to be asked. That the profitability of certain contracts has been draining away for years seems to be almost irrelevant, much more pressing is the corporate shame that results from a fall in annual premium income. It has amazed me for years why life office results are reported by sales first and profitability some time later, whereas most companies have profit as their key output.
Enough of that then, where can the life sector turn to rebuild margins going forward? Quite simply it can start actually doing something. Given that in the asset accumulation markets of bonds and straightforward pensions products life companies offer little more than dismal administration services and commission factoring, it seems clear to me that they must turn to the markets in which they originally made their name, in other words those markets in which risk is being borne - or at the very least managed - on behalf of clients.
Of course even in the protection markets most companies retain little risk these days. I understand that most reassurance treaties result in more than 80% of the risk being borne by one or more of the reinsurance firms while the life offices function as underwriting and administration buffers between client, adviser and the risk taker. Now there may be some merit in this, but it feels to me that this functionality will surely be replaced by technology at some point in the not too distant future.
The same goes for annuities. With the notable exception of the Prudential everyone seems to be running scared of this potentially lucrative, if risky, sector of the market. Why has it become so alien to make money from risk? Surely that is why the life industry came to be in the first place?
The entire at-retirement and in-retirement market is where the volume money sits, and yet we are faced with the bizarre situation that no-one wants to manage the money from this point forward. It should be possible to make far more money (for providers and advisers) in this market than it is collecting ad-hoc single premiums and arranging £200 per month direct debits.
The sooner the industry realises that there is little money to be made in commoditised services, except where the scale is enormous, and instead shifts attention to higher value services the better. After all, focusing on the former in what is a small market in a global sense will do little more than encourage predators from the US or Europe. Even where this is the end game I would rather see UK firms maximise their value by blending some valuable components alongside the commodity parts of their proposition.
Even in investment business there is scope for life offices to take some risk. While I entirely appreciate the need to maintain a flexible capital position it may just be that the only sensible use for life office capital is to drive profitability through the taking on of risk.
Ultimately risk, and particularly the long-term variant, is the business that insurers are in, the better that is understood and the stronger the sector will become. Asset accumulation is a distribution play these days and has only very limited value to add to traditional providers.
If I was running XYZ LifeCo I would be embracing risk with open arms. Done sensibly the risk-related products are the margin markets for life offices and the life sector should engineer itself into an appropriate financial position and then go make some money.
The Abacus is a product design and strategic marketing consultancy that has worked with over 50 life offices, asset management groups and other industry bodies since creation in 1999.
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