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Insurance Prospects Market Assessment
Key Note Publications Ltd, Jan 2002
Public Lacks Confidence IN Insurers
Key Note commissioned new research from NOP to discover consumers' perceptions of insurance companies, and found that only small minorities, mainly among the older middle-aged, rate leading insurers as doing a very good job. Norwich Union and Direct Line came top of the poll, but Cgnu (renamed Aviva since the survey was carried out) came last. Insurers still have a major task to convince the British public that they are efficient and provide a good service. Customers are nervous: some financial-services companies have broken promises personal pensions have a poor reputation employers are abolishing pension schemes based on final salaries and replacing them with uncertain open-market schemes and householders who live in flood zones can often find buildings and contents insurance only at rates far higher than they have paid before.
Over half of those surveyed by NOP said that they would always shop around for the best deal when buying insurance, even if offered a good loyalty bonus. Young adults are less loyal to existing insurance providers than their elders. Lack of loyalty is also connected to affluence and Internet usage. The survey also indicates that there is a lack of good financial advice available free of charge, and that Internet insurance sales are still minor, but slightly more significant than insurance sales from supermarkets.
Official Investigations Weigh heavy
Insurers have to adapt to lower investment returns, consumers' anxiety over the prospects for both unit-linked and with-profits policies, capped charges on stakeholder products, and a great deal more regulatory attention. The important Sandler Review was published on 8th July 2002. Ron Sandler - formerly the Chief Executive of Lloyd's of London - conducted a review for the Treasury into capital flows and commission structures of investment products, which could have a serious impact on the type of products that insurance companies are allowed to sell in future. The Pickering Report on pensions appeared two days after the Sandler Review, on 10th July, and an Inland Revenue report on pensions taxation is also expected before the end of 2002.
The Financial Services Authority (FSA) is looking into several aspects of the insurance industry, including the reinsurance sector. The FSA has some concerns about the extent of reinsurance, with unregulated companies prepared to offer better terms than in the regulated sector, which has suffered significant underwriting losses since 1997.
Controversial Boardroom Rewards
Boardroom pay levels are controversial when insurers are struggling to make any profits. £1m a year is now the threshold salary, not counting share options and pension fund contributions, for the chief executive of a national insurer. Customers and shareholders have increasing expectations that non-executive directors will function as corporate watchdogs, but the role of non-executive directors is limited by the amount of information they are given. Even auditors often complain that crucial information is withheld. The Higgs Report on the role of non-executive directors is due to be presented to the Government before the end of 2002, and should herald changes in practice.
Revival Potential
The Government has the power to help revive long-term insurance by rescinding the taxation of dividends paid into pension funds, and integrating the basic pension and the State Second Pension (SSP) into one benefit payable to all without means testing. This would mean that pensioners could receive the full benefit of all the savings they have managed to amass. To offset the cost, the minimum age for receipt of the state pension would probably need to be raised in stages to 70.
Prospects for life and medical insurance would be much improved if insurers could routinely use genetic information to help determine premiums, but customers with adverse profiles would risk rejection for cover. (In 2001, companies promised not to use genetic information until 2006.)
Insurance And The Older Population
The population is ageing. The older society has rather less need for insurance than a young society full of car drivers, home buyers, parents responsible for small children and needing to insure for death or loss of income, and adults saving for retirement. The prudent in the elderly society will still insure their homes and contents, their pets and their holiday travel, but once they have purchased one or more annuities, they have less need for long-term insurance.
However, perhaps half of those born between 1961 and 1965 will be living alone by the time they reach 75. Apart from having its own financial demands, solo living has repercussions for care. Solo householders may not have anyone to turn to for looking after them if they are ill or disabled, and thus may wish to insure for the costs of long-term care.
Bearish Forecasts
It is hard to believe that any year could be worse than 2001, but in the future, poor underwriting years are likely to outnumber good years, because the weather is becoming less predictable, storms fiercer, floods deeper and forest fires more devastating. People are also becoming more litigious, willing to press companies for compensation if they feel products or services have harmed them.
In bear markets such as the current one, insurers' usual practice of relying on income from investments to compensate for underwriting losses comes unstuck, and the greater the proportion of funds invested in equities, the more unstuck they become. At least 5 years of steady stock market growth is probably needed to revive the insurance sector, and also investors' confidence in insurance companies themselves.
Back To Basics
Insurers are in back-to-basics mode for advertising, focusing on straightforward products that carry a low risk of later litigation. Simple life insurance is proving resilient to the general downturn in financial advertising, as are motor and property insurance.
The automated direct sellers, which have tightly controlled costs and refuse to handle unusual risks, appear the best placed to make headway. Over the coming years to 2007, existing brand strength will be a dominant factor in insurance sales. This is an incentive for large insurers with relatively weak brand visibility in the UK to find partner distributors with stronger brands that carry greater public recognition.
The consumer insurance market itself has poor growth prospects in the short term, for both general and long-term insurance. In general insurance, the motor and property sectors have the best prospects, fuelled by the legal requirement for all vehicles used on public roads to be insured, and by mortgagers' insistence that mortgaged property is insured. These are captive markets. The commercial market will be restricted by the high cost of premiums, especially for all kinds of liability insurance.
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