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MP66038

MAPS ISSUES AND CHALLENGES IN THE UK LIFE ASSURANCE MARKET JULY 1998

Overview

Table of Contents

Executive Summary

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EXECUTIVE SUMMARY

The insurance industry is going through a period of change which may result in new methods of marketing and distribution, and will result in challenges for technology and product development.

Market Assessment conducted original consumer research to find the most important factors for customers when buying life assurance. The survey asked ‘I would like you to imagine that you are buying life assurance... which, if any of the following factors would be important to you if you were purchasing life assurance?’ .

Four major areas from which the challenges arise can be identified. These are:

· Europe - the single market and monetary union.

· Company structure- demutualisation, mergers and takeovers.

· Distribution - new methods, new markets and new operators.

· Technology - the use of new technology for marketing and distribution.

Economic factors are also shaping the industry. The strength of the pound influences the direction companies are taking within Europe and affects profits. Interest rates are a major factor; not only on the value of sterling, but also the housing market: an important source of business for UK insurers from both mortgage endowments and protection products. The overall economic environment also affects investment, a vital part of life assurance business and a source of profit.

GDP is intimately tied in with the amount of life assurance people buy. While life protection is important many do not see it as a necessary unless it is required by a lender. There is considerable evidence to point to the fact that as GDP increases so do sales of savings and investment products.

New business in the life assurance industry is looking quite healthy with figures for the short term (1997 and early 1998) showing an improvement, although over a slightly longer term, since the late 1980s, the picture looks less good. This pattern reflects a reduction in the amount of business arising from mortgage endowments. Individuals are spending more on life assurance in the 1990s but this appears to reflect higher amounts of insurance being purchased rather than a large increase in the number of policies sold.

EUROPE

Challenges are arising from the single market and economic and monetary union. It is apparent that the industry as a whole is inadequately prepared for these events in spite of the fact that they are inevitably going to influence the market.

The single market is a rather inaccurate term to describe the life assurance in Europe, as the European Union does not provide a true single market and indeed is not really regarded as such. However, there are similarities and differences which can be explored to indicate those areas in which there is greatest potential for development. The single market provides opportunities for UK insurers in Europe and also opportunities for European life insurers in the UK.

COMPANY STRUCTURE

During the latter part of the 1990s there has been an increase in corporate activity in the insurance sector and this will influence the way in which the market operates. There have been a number of mergers and takeovers leading several companies to demutualise. Others, such as Norwich Union have demutualised without any accompanying merger or takeover.

UK mergers are an attractive prospect with the potential for stronger companies, better placed to withstand the activities of the banks and building societies which are moving towards presenting themselves as one stop financial services centres. Corporate activity also allows companies to develop new markets and distribution methods. But perhaps the most overwhelming attraction of merger is the cost savings which can be made. In 1997 Royal & Sun Alliance upwardly adjusted the projected savings resulting from their merger.

Mergers and takeovers involving European companies provide a convenient way of entering new markets with ready made distribution networks. It is often easier to buy rather than to break into these markets, many of which are more consolidated than those of the UK.

DISTRIBUTION

Life assurance is mainly sold through direct sales forces, representatives of one company or through Independent Financial Advisors (IFAs) who select the most appropriate product by looking at the market and choosing a suitable product. Regular premium products are sold in greater volume by sales-force and single premium products are sold in greater volume by IFAs.

The industry has suffered from the publicity arising from the mis-selling of pensions in the late 1980s, which has influenced the public who are largely distrustful of insurance salesmen. This problem which needs to be addressed and steps taken to restore confidence.

Life assurance has not been at the cutting of edge of new ideas or reshaped by the direct selling companies to the extent that other insurance markets have been. There have been new entrants in the form of the retail/assurers who are offering simple cost based products as a volume commodity. This is a particularly suitable method of selling some personal lines policies but it remains to be seen how appropriate it is for life products. There are more obstacles for new entrants because of regulatory requirements, and complexity of products but doubtless there will be in roads made into this traditional market.

TECHNOLOGY

Technological advances have the potential to change the way in which the market operates. The general insurance market has been revolutionised by the introduction of Electronic Data Interchange (EDI) which produces online quotes and exchanges information. The Exchange is a project to develop EDI for IFA use. This will enable the IFA to quote instantly and, eventually it is hoped, to actually write business online.

The Internet has also been tentatively embraced by the industry, about half of life assurance companies in the UK have Internet sites. There is little confidence in the prospect of using the Internet as a major distribution outlet. However, there is potential to use it for gathering customer information and for communicating with, informing and training IFAs.

Life assurance companies have not been quick to develop the potential offered by the new technologies and development using these tools has been slow.

FUTURE PROSPECTS

The future of the life assurance industry looks good until the early years of the 2000 decade, it is unlikely that there will be significant changes. However, by 2008, Market Assessment predicts that there will changes in distribution, better use of available technology, and the industry in the UK will become more consolidated with several large insurers dominating the market. These may be of a more pan-European nature than currently seen.

Text © 1998 MAPS

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