The distribution dilemma

Abstract

The world of business is riddled with change and complexity – none more so than the life and pensions industry. Banks, for instance, have long sat on the side-lines, but now see long-term savings as a key market to boost revenue growth – should authorities further “iron-out” the final creases in regulation. In addition to new competitors, there is a wide range of structural challenges confronting insurance industry competitors. Consumers continue to shun long-term savings, notably pensions – an UK study in 2002 estimated the savings gap at $50B (ABI, 2002) – with many consumers finding alternative assets such as property more attractive although the transaction costs (stamp duty) remains high. The market is attracting heightened regulatory scrutiny on a number of fronts. There are wide-ranging product persistency and top-line growth challenges and, not surprisingly, increasing pricing pressure across the product spectrum. However, our investigation into the UK insurance market has convinced us that the heart of the problem facing the industry is found in the structure of the business model in use across the life and pensions industry – using a costly face-to-face advisor to identify likely buyers, to sell and service that business once it is underwritten. There is a significant misalignment in value that has built up between product providers, retail customers and independent financial advisors (IFAs) who are responsible for the majority of life and pensions sales in the UK. This mismatch between value provided and costs borne makes the current business model an unsustainable proposition going forward. This distribution problem has long been recognised but, unfortunately, has yet to be addressed. To quote a senior executive of a major life office this is “due to industry sloth, rather than failure of policy”.