SCOTLAND’S life insurance sector has had a white-knuckle ride in recent years.
Just three years ago, survival was the order of the day for Scotland’s life insurers as plunging stock markets stretched their solvency ratios to breaking point.
Eager to avoid another Equitable Life-style collapse, the Financial Services Authority started shining a light on some of the industry’s more opaque practices and, unimpressed by what it saw, has been insisting on greater transparency in financial reporting. This has had big implications for the sector as a whole and not least for Standard Life.
The life and pensions sector has been further squeezed by the government’s desire to cap the charges it can levy on many mass-market savings products to around 1%. It has also had to face up to radical changes in the way it distributes its products (with the old polarity between selling through intermediaries such as IFAs and selling through bank branches having broken down) as well as the dramatic decline in the popularity of its core “with-profits” products.
Then there is Lord Turner’s proposal for a National Pensions Saving Scheme, which depending on how it ends up being implemented, could be either good or bad news for the sector.
Against such a backdrop most life insurance companies have been forced to reinvent themselves to ensure they have a sustainable future, a painful process that has involved among other things heavy job losses and refocusing on more profitable market segments. They have also universally had to cut back on the bonuses paid out to consumers, at the same time imposing punitive “market value adjusters” on customers who realise certain products early – which has hardly endeared them to their clientele.
However the reward for life insurance companies has been they have emerged fitter, leaner and in a more robust financial state. Recent rises in global stock markets — including the recovery of the FTSE-100 index from its low of 3,287 in March 2003 to the highs of more than 6100 seen in April — has improved finances across the sector as well as bringing a surge in new business.
Harry Gibb, head of management consultancy Gibb Consulting and former marketing director of Glasgow-based Scottish Friendly, says: “There are definite signs of a recovery across the sector, and that’s partly been driven by increased consumer confidence.”
Green shoots for life insurance?
Recent UK-wide figures from the Association of British Insurers (ABI), showed that new business volumes rose sharply in the first quarter of 2006. Overall life and pension sales reached £3.3bn in terms of “annual premium equivalent” (APE), their highest ever, while single premium individual pensions new business climbed 49% to £3.84bn.
Standard Life — where the pain of facing up to some of new challenges has been more strongly felt — on 30 May said its worldwide new business profit in the first three months of 2006 was £30m, compared to £33m for the whole of 2005. On an APE basis, Standard Life’s sales rose 7% at £342m in the quarter.
There have been other pockets of success in Scotland, notably that of Bright Grey, which was launched by Scottish Life in March 2003 and has grown a respectable share in the UK market for protection products. “They have carved out a niche by being more attuned to what customers want,” says Gibb.
So, with a recovery underway, what are the biggest challenges facing the sector today? In the UK the two biggest are over-supply and consolidation.
First, there are simply too many insurers’ chasing too little business in the UK market, especially in product categories where prices have been capped by the government. This has led to larger insurance companies including Aviva, Prudential and Standard Life shifting their emphasis towards higher margin international markets – particularly in Asia. Smaller ones are tending to focus on their strengths rather than seeking to be “waterfront” players, offering a wide range of products and services.
And following the failure of life insurance giant Aviva’s £17 billion all-share takeover of UK number two Prudential in March (the offer was rejected by the Pru), Axa’s recent £5.4 billion acquisition of Swiss insurer Winterthur, and last year’s merger of Resolution and Britannia, analysts are predicting further consolidation in the sector.
Many Scottish life insurance players — including Scottish Widows (now part of Lloyds TSB), Scottish Amicable (Prudential), Scottish Equitable (Aegon), Scottish Provident (Abbey and now Resolution Life) and Scottish Life (Royal London) — have already been taken over larger English or European players but this does not mean they will be immune from further consolidation.
And Standard Life’s 10 July 2006 IPO (initial public offering) has actually made it more, not less susceptible to being taken over. Many in the Scottish financial sector would prefer to see the Lothian Road based insurance group continue thrive as an independent, standalone plc. However, with its market value in the £4 billion to £5 billion range, Standard Life is no longer the presumed giant it once was and could end up being a tasty morsel for a more global insurance player.
If Standard Life were to be acquired, a takeover by another UK player would, almost certainly, be worse news for jobs in Scotland than a takeover by a foreign player. The example of Dutch insurer Aegon’s acquisition of Scottish Equitable in the 1990s proves that overseas takeovers, while they may dent national pride, can have a beneficial effect on employment levels. Aegon/Scottish Equitable and has in fact grown total jobs in Scotland from 1,800 to more than 3,000, and to 4,500 across the UK as a whole in the past decade.
Gibb believes that one reason that Scottish insurers have traditionally been vulnerable to takeover is that most remained mid-sized players in a relatively crowded market in which it is difficult to differentiate products.
Secondly, the market is commoditised. “It remains an industry of me-too products. As soon as anyone develops a new product everyone else copies it. This makes it very difficult to differentiate a brand. Very few life insurance firms have strong brands. One of the very few that does is Scottish Widows, which has successfully turned a potential negative into a major positive.”
Chris Kenny, the ABI’s director of life and pensions, says that the latest strong figures from the industry show, above all, that it has surmounted the challenges of “A-Day” — 6 April 2006 — when the UK government sought to simplify the taxation of UK pensions. “The insurance industry has innovated, at the same time as maintaining high levels of customer service through statutory changes to its business environment.”
This article on Scotland’s life insurance sector was published under the headline “An industry that is fitter and leaner” in the Scottish Financial Services Yearbook in August 2006, published by Glasgow-based Mediaworks (www.mediaworksltd.co.uk)