Against the background of plunging new life and savings
business, industry body the Insurance Industry Working Group has
published a bold strategy which, if accepted, would see industry
players, the government and regulators join forces to forces to
strengthen the UK insurance industry at home and
With first-half 2009 results steadily coming in from UK insurers, a
clear picture of the heavy toll economic recession is taking on new
life and pensions business is emerging.
Typical of first half 2009 results were those posted by Aviva which
saw the present value of UK premium income fall 21.2 percent from
£6.01 billion ($10.2 billion) in the first half of 2008 to £4.7
billion. This was despite Aviva reporting an increase in its share
of the UK’s life market from 11 percent in the first quarter of
2008 to 11.9 percent in the first quarter of 2009.
Experiencing an even more significant fall in new business was the
biggest player in the UK’s bancassurance sector, Lloyds Banking
Group, which saw new UK business premium income slide 28.7 percent
from £7.6 billion in the first half of 2008 to £5.4 billion.
Lloyds’ UK life, pensions and investments business includes
Scottish Widows and those of UK bank HBOS which it acquired in
January 2009. HBOS’ business is written under the Clerical Medical
and Halifax brands.
Results from Standard Life reflected a picture similar to Aviva and
Lloyds, with the present value of its UK life and pensions new
business down 24.2 percent from £6.9 billion in the first half of
2008 to £5.3 billion in the first half of 2009.
Consumers under pressure
New business in the first half of 2009 undoubtedly
reflects consumers experiencing financial stress and deteriorating
Indicatively, data published by the Office of National Statistics
(ONS) in August reflects that the downturn in output continues to
impact the labour market, with total employment in the three months
to May 2009 falling by 543,000 compared to the same three month
period in 2008. This reduced the employment level of the working
age population from 74.9 percent to 72.9 percent.
The ONS also emphasised that the economy is likely to continue
weakening and that the Treasury’s forecast of a 3.5 percent
contraction in the UK’s GDP in 2009 appears to be on the optimistic
“The likelihood is that the UK economy is already in its deepest
post-war recession,” stressed the ONS.
The ONS noted that each month the Treasury publishes the averages
of independent forecasts made for the UK economy and that in July,
the average forecast for GDP growth in 2009 was a contraction of 4
percent. This represented a gloomier outlook than in June, when the
average forecast was for a contraction of 3.7 percent.
The impact of pressure on consumers’ ability to save was already
strongly evident in late-2008, when a survey conducted by online
product comparison service uSwitch.com revealed that between 27
August and 3 September 2008 an astounding 42 percent of consumers
had cancelled at least one insurance policy or pension
contributions in a bid to cut costs. This meant that potentially
about 19 million people had reduced their financial security, or
ditched it entirely.
Indicative of the slump in contributions to pensions savings,
Standard Life reported net inflows into private pension products of
£361 million in the first half of 2009. This was down 29 percent
compared with a £505 million net inflow in the first half of 2008
and 37 percent down compared with a net inflow of £570 million in
the first half of 2007.
Savings and investments business reported by Standard Life
reflected an even more severe reversal with a net inflow of £433
million in the first half of 2008 swinging to a net outflow of £489
million in the first half of 2009.
The insurance industry is well aware of the challenges it faces,
and to this end the Insurance Industry Working Group (IIWG) has
produced a comprehensive study on steps required to promote growth.
The study, A Bright Future: The UK Insurance Industry Envisioned
for 2020, was published in late-July 2009.
The IIWG was established in October 2008 to look at the challenges
and opportunities facing the UK Insurance Industry. It is
co-chaired by the Chancellor of the Exchequer, Alistair Darling and
Andrew Moss, group chief executive of Aviva and includes leading
figures from across the insurance sector.
The findings of the IIWG’s study will be reported to the
Chancellor’s High-Level Group on City Competitiveness, which will
meet later this year.
In his forward to the study Moss stressed: “The clear vision for
the insurance industry in 2020 began with an objective that is easy
to define but difficult to achieve.”
Highlighting the significance of ensuring a robust future for the
UK insurance industry study highlighted that it is the second
largest in the world, employs some 313,000 people in the UK and is
responsible for investments equivalent to a quarter of the UK’s
total net worth.
There are about 1,100 insurance companies operating in the UK. Of
these, 209 companies carry out life and pension business only and
46 carry out both general and life insurance business.
The study makes numerous recommendations under four themes:
• Increasing customer confidence and trust, and developing a
greater awareness of their own personal responsibility;
• A broader choice of competitively-priced risk management
solutions, which provide customers with products they need;
• A partnership between government and the insurance industry to
increase savings and protection provision, and reduce the financial
distress caused to consumers by a variety of risks; and
• Encourage capital flows into the UK insurance industry by
ensuring its competitive position in the global marketplace is
maintained and enhanced.
In its study, the IIWG’s stressed that a key issue to be tackled is
the drive for a more customer-focused approach. The aim is to
increase customers’ confidence and trust in the UK insurance
industry and also foster a greater awareness of their own personal
The IIWG noted that improvements in financial
awareness are particularly important to address declining savings
Undoubtedly one of the major problems from a premium income growth
perspective faced by the life insurance industry is the sharp
decline in personal savings.
Defined as the proportion of household disposable income committed
to savings, ONS data shows that the savings ratio has declined
steadily since reaching a peak of 12 percent in the fourth quarter
of 1992 and stood at 3 percent in the first quarter of 2009.
Lack of enthusiasm for savings among a significant proportion of
consumers was highlighted by a study published by the Association
of British Insurers (ABI) in June this year. Based on an extensive
consumer survey the ABI found that as a result of the economic
downturn 54 percent of respondents believe that the benefits to be
derived from saving had “gone down a lot.”
In contrast, only some 2 percent of respondents believe that
benefits to be derived from savings have “gone up a lot.”
The ABI survey also revealed that while 77 percent of pension
savers said their levels of saving would be unaffected by the
economic environment, just 43 percent of those with non-pension
savings and investments said it would make no difference to the
amount they contribute.
The ABI expressed particular concern that, of those respondents
with non-pension savings and investments, 28 percent said they
intend to contribute less and a further 10 percent said they would
stop contributing altogether. For those who do not hold non-pension
savings and investments, 51 percent said the current economic
climate would make them less likely to start saving.
Reluctance to save comes against the equally concerning background
of the dire straits the majority of people would find themselves in
if the were to become unemployed. Specifically, over 60 percent of
respondents believe they would cope badly, including about
one-third who felt they would fare very badly if they lost their
Encouraging a savings ethic
There are already a number of initiatives underway aimed at
improving customer awareness of the need to increase savings and
instil in them greater confidence in the insurance industry. The
most significant of these are the Financial Services Authority’s
(FSA) Treating Customers Fairly initiative, Retail Distribution
Review (RDR) and educational and informational projects and the
Association of British Insurers’ consumer strategy.
The IIWG’s recommendation is to essentially build on existing
initiatives as well as to undertake an independent review of the
overall effectiveness of all the changes affecting retail
distribution, within three to five years of the implementation of
the FSA’s RDR.
First made public as a discussion paper published in June 2007, the
RDR’s objective is to enhance consumer confidence in the retail
investment market by supporting education of consumers about
different types of services available, improved professional
standards in the industry and transparent remuneration for
financial advisers. Full-implementation of the RDR is scheduled for
Implementation of the RDR took an important step forward in June
2009 with publication by the FSA of a consultation paper setting
out proposed wide ranging changes relating to financial
In particular, the FSA is consulting on rules to ensure that:
• Independent advice is truly independent and reflects investors’
• People can clearly identify and understand the service they are
• Commission-bias is removed from the system and recommendations
made by advisers are not influenced by product providers;
• Investors know up-front how much advice is going to cost and how
they will pay for it; and
• All investment advisers will be qualified to a new, higher level,
regarded as equivalent to the first year of a degree.
The FSA’s consultation paper received a mixed reaction in the
insurance market from, among, others Aegon UK.
“From the implementation proposals outlined, FSA gets a mixed
report card,” said Francis McGee, head of corporate affairs at
Aegon UK. “On the plus side the RDR has always looked as though it
would deliver on improved professionalism in the advice sector and
the FSA has shown it won’t compromise on the step change in
standards and remuneration.”
He continued: “But FSA still needs to do a lot better if we’re to
meet the original RDR aim of increasing consumer access to advice
McGee took particular issue with the proposed ban on factoring and
the blanket application of higher qualifications and adviser
charging to simplified advice models. In essence, factoring
involves product providers paying fees upfront to advisers and
deducting them over time.
Implementation of these two proposed measures was “particularly
disappointing” and will stifle innovation and make it more
difficult for people making modest regular savings to pay for
advice, stressed McGee. A full review of the proposals is urgently
required, he added.
Partnership with government
Another key issue holding the potential for expansion of the
private insurance market addressed by the IIWG in its study is
partnership with the government. Indicative of the potential, the
IIWG’s study revealed that the government currently provides almost
65 percent of the addressable risk management market for retirement
provision, accident, health care and income protection, with the
balance underwritten by insurers.
Recommendations made by the IIWG with regard to an expanded role
for the insurance industry call for further discussion with the
government to assess the scope for a greater industry role in
dealing with risks such as unemployment, ill-health, retirement
income and long-term care.
The IIWG also believes that there is a need for government to
provide incentives to help encourage personal responsibility in
respect of savings and protection coverage.
The fourth key focus of the IIWG’s study is the need to encourage
capital flows into the UK insurance industry. The IIWG study
emphasised that the UK’s competitive position in the global
insurance marketplace needs to be maintained and enhanced, by
ensuring that capital can earn a competitive return.
The main recommendations linked to this theme are:
• The industry must work with the government to deliver a stable,
predictable and competitive tax system for the medium to long-term,
which must take account of increasing global competition in a world
in which capital is flexible and highly mobile;
• The industry must work with the government and the FSA to promote
a stable regulatory regime and to ensure regulation provides
cost-effective and appropriate oversight;
• The industry should develop and attract the best talent;
• The industry must work with the government to proactively support
the UK’s insurance business abroad, particularly in emerging
markets, as well as within the UK.
While industry leaders mull over the future path of the UK’s
industry a particularly opportunistic player – Clive Cowdery – is
using the current market environment as an acquisitive hunting
Spearheading his drive is Resolution Holdings, a buyout company he
established in 2008 and which listed on the London Stock Exchange
in December 2008.
Cowdery is best known for his key role in growing Resolution Life
from a start-up in 2004 into a major force in the UK closed life
book market. In early-2008 Resolution Life was acquired by rival
Pearl Group for £5 billion in a deal that netted Cowdery £150
He will no doubt be looking for more of the same success with
Resolution Holdings’ first major acquisition target, Friends
Provident – which in 2007 was the subject of a failed acquisition
bid by Resolution Life. According to the Association of British
Insurers, Friends Provident ranked as the UK’s 12th-largest life
insurer in 2007 based on premium income generated in the UK.
This time Cowdery’s acquisitive objective appears to be destined
for success with the 177-year-old UK life insurer’s board, after
having rebuffed Resolution Holdings’ first approach, recommending
acceptance of a second, amended offer worth £1.9 billion.
“The board of Friends Provident is pleased to have secured this
attractive transaction for shareholders,” commented Sir Adrian
Montague, Friends Provident’s chairman. “The transaction offers
shareholders the choice of an attractive premium on exit or the
opportunity to be part of Resolution’s first financial services
The offer is a combination of new Resolution Holdings shares and a
limited cash offer for up to the first 2,500 shares at £0.79 per
Friends Provident share held by each Friends Provident shareholder.
The maximum cash amount available under the acquisition offer is
For Friends Provident shareholders, the offer is attractive and
values its shares at a premium of about 33 percent just prior to
release of the offer. For Resolution Holdings, attraction lies in
its offer’s deep discount to Friends Provident’s European Embedded
Value of £1.15 as at 30 June 2009.
In the first half of 2009 Friends Provident reported new life and
pensions business £319 million annualised premium equivalent, down
37 percent compared with £507 million reported in the first half of
2008. Based on International Financial Reporting Standards, the
insurer recorded an after tax loss of £218 million in the first
half of 2009 compared with an after tax loss of £11 million in the
first half of 2008. Friends Provident’s pre-tax loss totalled £871
million in 2008.
Undoubtedly Cowdery also sees considerable turnaround potential in
the embattled Friends Provident, which in early-2008 had also been
considered as a potential acquisition target by US private equity
firm JC Flowers.
Resolution Holdings’ objectives have also received a warm welcome
from Friends Provident’s CEO Trevor Matthews.
“We are excited by the prospects for our business as the foundation
for Resolution’s consolidation and restructuring strategy for the
open businesses in the life and asset management sectors,” said
“Resolution is supportive of our current strategy and turnaround
plan,” he continued. “We sum up our existing organic growth
strategy in just four words: fix UK, build international.”
Resolution Holdings will be renamed Friends Provident Holdings (UK)
Limited on completion of the acquisition but, stressed Resolution
in its acquisition document, “does not expect to be the long-term
owner of the life and asset management group.”
Resolution added that it anticipates that Friends Provident’s
current consolidation and restructuring project in the life and
asset management sectors will last between two to four years, after
which it expects to “return value for the enlarged group
Armed with a total of some £5 billion in investable capital
committed by its investors Resolution has made it clear that
Friends Provident is just the first in a series of acquisitions of
financial service companies with significant turn-around
Notably Resolution numbers among shareholders holding stakes of
between 5 percent and 7 percent Aviva, Legal & General and
Standard Life, indicating that they are anticipating big things out
of the turnaround specialist.
It makes for potentially interesting developments in the UK’s
insurance market which Cowdery believes is ripe for consolidation.
Among Resolution’s potential targets now being widely speculated on
in the British media are Old Mutual and Lloyds Banking Group
subsidiaries Scottish Widows and Clerical Medical.