A report from market analyst Datamonitor reveals that the life assurance market will grow by over £1.8 bn in the next four years to £5bn as stock markets recover and protection products remain popular.
It says life insurance companies will have to world will have to work hard and make sure they have learnt their lessons from the last few years if they are to regain customer trust and interest, warns Liz Hartley, financial services analyst at Datamonitor and author of the report.
She says: “Since 2000 the UK life market has fallen in value by almost £800m, with a drop of over £600m from 2002 to 2003 as a result of significant falls in single premium savings business, which has been badly affected by falling equity values, weak consumer confidence and negative press.
“While the savings side of the life market has languished, the protection market has prospered, as premiums have risen by an average annual rate of almost 12% since 2000, so thatprotection products accounted for 40% of total life premiums in 2003.
“Consumer appetite for protection such as term assurance – has increased as the boom in consumer credit lines and the growth of the housing market has led to many consumers re-examining their loans and mortgage situation.
“Term products have replaced endowments as the star performance product. They experienced strong growth from 2002-2003, with total new premium income increasing on average by 23% per annum, while endowments have all but collapsed, falling from £278m in 2000 to a mere £42m in 2003.
“Endowments, which were so popular in the 1980s and 1990s, have failed, leaving many policyholders with severe mortgage shortfalls. As a result, today's customers have moved towards less risky forms of protection, with term assurance benefiting strongly.
“The future of endowments will depend heavily on providers learning the lesson that they have been taught in the last few years, and an upturn in stock market conditions will help return this product to growth over the next four years.”
The single premium life market value dropped heavily in 2003, falling by 26% to just £1.8m since 2002. Weak stock market returns and the current UK spending culture have made it difficult to sell savings products. A key driver of the poor performance of the single premiummarket has been the fall from grace of with-profits products. With-profits bonds have been badly managed, with consumers seeing their bonuses slashed. The products have become deeply unpopular with consumers, advisers and providers alike, so that premium income plummeted from over £1bn in 2002 to less than £300m in 2003.
However, Datamonitor says it forecasts that the with-profits market will pick up from 2006 as improved equity market returns fuel consumer interest, as well as provider and adviser efforts to sell these products. Unit-linked bonds have benefited from the customer and adviser desertion of with-profits products. The improvement in the with-profits market, however, will limit the potential of unit-linked bonds.
As the total life market has faltered, the largest insurers have gotten bigger and bigger. The ten largest players have exhibited a strong rise in premium growth in the last few years, with their market share increasing at the expense of the smaller players, who have found itmore difficult to compete.
As times have become tough through scandals and poor product performance, the larger players have been able to use their size and ready access to capital markets to ride out the storm. The top ten competitors accounted for over 75% of premiums in 2002, illustratingthe incredible amount of power and influence concentrated in just a few hands.
Medium-sized insurers have stagnated and now find themselves potential merger targets, lacking the size, strength and capabilities needed to remain competitive in this tough new environment. The smallest competitors have been in heavy decline since 1999, dropping from acombined value of £718m in 1999 to just £172m in 2002 and have shrunk from controlling 19.5% market share to a mere 5.1%.
There has been movement within the competitive ranks, as HBOS has overtaken Aviva to become the UK's leading life insurance provider with almost 12% market share in 2002 and its Halifax Life brand being particularly strong. HBOS's strength in the mortgage and bancassurance market has helped to protect it from perhaps a greater fall in annual premium business that may have been suffered by other life providers.
Aviva has dropped into third place as a result of a steep fall in single premiums. Its relationships with RBOS and other third parties have been important in generating and maintaining new business levels. Likewise, Legal & General's strategy of manufacturing excellence and holding strong distribution relationships with bancassurers and retailers has proven a good move.
Prudential, however, has experienced a drop in business as a result of its large book of single premiums. In 2003 Prudential made a major blunder in its critical illness business, angering IFAs and badly damaging its distribution relationships without any significant bancassurance channel to fall back on.
Datamoniter adds that the bancassurance channel has become a real force in life assurance distribution, with over 15% share of the annual premium market and more than 21% in the single premium market in 2003.
Banks potential for cross-selling life products with mortgages has been harnessed and nowsavings products are being increasingly sold through this channel too.
Going forward, bancassurers will continue to increase their share of the annual premium market to 26% by 2008, although their share of the single premium market will grow very slowly as IFAs will maintain their dominance in the savings product market.
IFAs will continue to control over half of the single premium market, as products and consumers require quality advice and understanding. However, IFAs have seen their market share of annual premiums impacted by the inroads made by the bancassurance channel. As protection products become increasingly commoditized, IFAs will find their market share of annual premium stagnating at little over 40% over the next four years. Despite warnings about the rise of the bancassurance channel in the depolarization era, IFAs will still be the key saleschannel for long-term insurance products.