UK insurers entered 2008 with what had been one of their most
successful years ever behind them. But 2008 soon proved to be
anything but an easy ride, and while UK life insurers acquitted
themselves well they continue to face market conditions likely to
test their mettle to the full in the months ahead.
The year 2007 was a golden one for UK insurers with the industry
surging ahead to garner 11.4 percent of total global premium income
and become the second-largest after the US. In the process the UK
edged Japan into third position in the life insurance sector.
UK financial services industry body the International Financial
Services, London (IFSL) attributed the UK industry’s ousting of
Japan, which held a 10.5 percent share of global insurance premiums
in 2007, to a combination of very favourable factors. The most
significant were faster growth of new life insurance business in
the UK than in Japan, a better performing UK equity market and
faster growth of the UK economy.
Data from industry body the Association of British Insurers
(ABI) reflects that during 2007 total premium income generated by
the UK’s insurance industry increased by 21.7 percent compared with
2006 to £262.6 billion ($390 billion).
Life insurers led the way, recording an increase in total net
premium income of 25.5 percent compared with 2006 to £218.9 billion
while general insurance premium income increased by 5.6 percent to
£43.7 billion in 2007.Of total life insurance premium income UK
business contributed £185.4 billion and foreign business £33.51
Also enjoying robust growth in 2007 were insurance net exports
from the UK, general and life, which grew by 34.1 percent to £5.5
billion, according to the IFSL. In addition, total funds under
management of insurers ended 2007 at £1.6 trillion, up 13.9 percent
and almost double those of any other European country. More than 90
percent of funds under management originated from life insurance
A significant component of the UK’s economy, there are according
to the ABI 1,017 companies licensed by the UK’s Financial Services
Authority to carry out insurance business of which 762 are general
insurers, 209 life insurers and 46 composite insurers. Overall the
insurance industry accounts for 1 percent of UK’s GDP, excluding
the contribution of brokers and other auxiliary professions, and
employs over 325,000 people.
End of the good times
The good times of 2007 came to an abrupt halt in 2008 sending
share prices including those of UK insurers tumbling.At its worst
in November 2008, the UK benchmark FTSE350 Insurance Index had lost
almost 54 percent of its value since the start of the year before
recovering to end the year 35.6 percent down. By comparison the key
composite UK equity market index, the FTSE 100, ended 2008 down
The decline in the FTSE350 Insurance Index was, however, modest
by comparison with the 59 percent fall in the US S&P Insurance
Index in 2008. This would appear to justify to an extent the IFSL’s
view that the impact of the global financial crisis on the UK’s
insurance market has so far been “limited.” While true of UK
insurers’ ability to weather the crisis from a capital-strength
perspective the same cannot be said of the impact on new
According to the ABI the life industry recorded a new business
premium income decline of 11 percent in first three quarters of
2008 compared with the same period in 2007, while third-quarter
sales were down a hefty 16.7 percent compared with the third
quarter of 2007. Unsurprisingly, the biggest slump in new business
has been in the investment and savings product category which in
2007 accounted for 40.9 percent of total new single premium income
business and 36.7 percent of total new business.
ABI data show that in the first three quarters of 2008 new
single premium income and savings business fell by 22.5 percent
compared with the same period in 2007 to £22.9 billion.
Third-quarter new business in this category registered an even more
substantial decline, slumping by 42.1 percent compared with the
third quarter of 2007 to £5.8 billion.
Also reflecting a major decline in sales in 2008 was another key
area of new business, single premium individual pensions which in
2007 contributed 23.3 percent of total new single premium income
business and 20.9 percent of total new business.
According to the ABI new single premium individual pensions
business in the first three quarters of 2008 fell by 13.8 percent
compared with the same period in 2007 with the decline in the third
quarter of 2008 the highest during the period at 18.1 percent.
Though a relatively minor part of the UK life insurance industry
in volume terms, individual protection products such as term and
whole life, critical illness and income protection also fell
substantially. During the first three quarters of 2008 ABI data
reflects a 12.1 percent decline in the category (regular and single
premium) compared with the same period in 2007 to £1.51 billion.
New business in the third quarter of 2008 reflected a 17.2 percent
decline to £480 million.
While 2008 was a bad year for UK life insurers the worst does
not appear to be over. This prompted rating agency Moody’s
Investors Services to declare in a study published in December 2008
that the credit outlook for the UK life industry for the next one
to two years is, in its view, negative.
On a positive note, and in keeping with the IFSL’s sentiment,
Moody’s noted that the UK life industry has “very strong
liquidity,” and a “robust capital position,” despite the impact of
falling equity markets. As a consequence of this strength Moody’s
believes insurers are unlikely to be forced to realise current
unrealised investment asset losses. In addition, Moody’s commented
that UK insurers’ asset-liability management techniques have
improved substantially in recent years, improving the industry’s
ability to manage its risks during times of economic stress.
Partly responsible for this improved situation was the
introduction by the Financial Services Authority in December 2004
of a requirement that insurers take a risk-based approach to
calculating their capital.
However, despite better risk management, including the hedging
and/or sales of equity by life insurers during 2008, Moody’s
stressed that insurers’ equity exposure generally remains high and
during a period of equity market pressure and volatility increases
the industry’s risk profile.
According to the ABI the composition of the UK life insurance
industry’s total investment holdings at the end of 2007 included 22
percent in UK equity and 14 percent in foreign equity, 10 percent
in other UK company securities and 9 percent in other foreign
Equity exposure is concentrated in with-profits portfolios,
noted Moody’s, and because of the life industry’s historical focus
on these products continues to dominate balance sheets in most
Moody’s also cautioned that the decline in new business seen
particularly in the third quarter of 2008 could potentially gather
pace given the recessionary economic environment.
Already having taken a hefty toll in the latter part of 2008,
the recession will worsen during 2009 believes UK independent
economics consultancy, Centre for Economics and Business Research
(CEBR). Indeed CEBR predicts the UK economy set for its worst
single year slide in over 60 years.
In an assessment of economic prospects published at the end of
December 2008 CEBR predicts that the UK’s GDP will contract by 2.9
percent in real terms during 2009.
“Our investigations suggest that the last time the economy
shrank as fast was 1946, when the country faced the massive
post-war demilitarisation,” commented a CEBR economist, Charles
Driving the UK’s GDP lower in 2009 will be a 1.8 percent decline
in household expenditure and a 15 percent collapse in total
investment spending by businesses, predicts CEBR.
Profits under pressure
Not surprisingly Moody’s believes that in terms of profitability
most UK life groups are under “considerable pressure.” This,
explained the rating agency, reflects a difficult economic climate,
with its implications for the volume of new life and pensions
sales, combined with concerns about some of what it termed
“systemically unprofitable” business lines in the UK market.
Specifically, noted Moody’s,
profitability of product lines in the UK vary widely, with the
least profitable usually personal and group pensions and the most
profitable usually protection and annuity business.
The rating agency continued that while some insurers can show
high profit margins on individual lines, overall profitability in
the UK life sector remains low, and given the regulatory
environment and competitive pressures it is unlikely that this will
improve in the short- to medium-term.
In many respects the decline in the role of the tied agent
marketing channel and the rise to dominance of independent
financial advisers (IFA) compels insurers, particularly the large
ones, to offer the full menu of products irrespective of
profitability. Moody’s noted that it believes lack of control over
the IFA channel combined with often high levels of commission
required to retain business flow, make IFA distribution a
contributor to the poor financial performance of many UK life
According to the ABI, in the third quarter of 2008 IFAs
accounted for 78.3 percent of new single premium business and 70.9
percent of new regular premium business. On a weighted average
basis IFAs accounted for some 76 percent of total sales, 10
percentage points more than in 2005.
Tied agents accounted for 17 percent of total new sales in the
third quarter of 2008, and non-intermediated channels including
direct marketing 7 percent. In 2005 the two channels accounted for
26 percent and 8 percent of total sales, respectively.
However, it is not that the IFA’s position is unassailable with
potentially the biggest challenge coming from bancassurance.
Significantly, the highest volume of new business in 2007 was
recorded by banking group HBOS through its wholly owned units Bank
of Scotland and Halifax Bank and 50 percent owned Sainsbury
HBOS’ sales of £11.94 billion in 2007 were up 45.9 percent
compared with 2006 and gave it a market share of 11.1 percent. This
enabled the bank to edge Standard Life with sales of £11.34 billion
into second place with a market share of 10.5 percent. Notably, in
2005 HBOS ranked fourth in the UK’s life market with sales of £6.42
billion and a market share of 8.8 percent.
Another banking group, Lloyds TSB, has also built a solid
position in the UK’s life market, though its market share fell from
7.7 percent in 2005 to 6.7 percent in 2007 and its ranking from
fifth to seventh during the three years. Scottish Widows is the
main brand for Lloyds TSB’s life and pensions and pensions
In late-January 2009 Lloyds TSB will become the largest player
in the UK’s life market when it completes the acquisition of HBOS
in a deal worth £9.8 billion. The combined group will have 3,000
branches, the largest network in the UK, and based on 2007 data
generate annual new life insurance business of £19.2 billion,
giving it a market share of almost 18 percent.
HSBC is another UK banking group that has set its sights on
becoming a more formidable force in bancassurance. In the UK, where
HSBC Life UK celebrated its 20th anniversary in July 2008, HSBC has
improved its market position considerably in recent years, lifting
new business by 77.6 percent in 2007 to £2.23 billion and improving
its ranking from 14th in 2006 to 13th in 2007.
Not all bad news
Despite strong headwinds facing UK life insurers there are a
number of positive factors including the lack of adequate private
pension provision which, believes Moody’s, is likely to “fuel
growth for many years to come.”
Unfortunately this is unlikely to be true in 2009, indicates
research carried out by UK insurer Prudential which revealed that
the average voluntary contributions to private and company schemes
had fallen from £144.57 in March 2008 to £129.35 in September.
However, the basic premise underlying Moody’s positive medium-
to longer-term optimism – that there is scope for increased private
pension product sales – appears sound.
According to the National Statistics Office only 43 percent (7.6
million) of working men contributed to a private pension plan in
2006 (the latest available data) compared with 49 percent (8
million) in 2000. The pattern was similar among working women with
37 percent (6.2 million) having contributed to a private pension in
2006 – down from 38 percent in 2000.
Seemingly more likely to provide a stable growth opportunity for
insurers is the at-retirement market fueled by the growing stream
of baby-boomers moving into retirement. The at-retirement market
was worth £13.6 billion in 2007, according to consultancy Watson
Wyatt which predicts that it will grow to over £30 billion a year
“The phenomenal growth we can expect in the at-retirement market
in the next few years is in part a consequence of the personal
pensions sales boom back in the late 1980s and early 1990s,”
explained a senior consultant at Watson Wyatt Mark Joannes. “A lot
of those people who took out personal pensions back then are now
coming up to retirement age,” he added.
The retirement market provides another significant growth
opportunity in the form of home equity release, believes UK insurer
Aviva’s Norwich Union (NU) unit, a leading player in the equity
release market over the past decade.
“While the economic turmoil has been hugely detrimental to many
parts of the UK economy, it may actually stimulate growth in the
equity release market,” said NU’s head of post retirement
marketing, Anthony Rafferty.
He added that growth will also be stimulated by banks and
building societies entering into referral deals, the general lack
of pension provision and the government’s push for self-funded
Based on its research encompassing records of over 80,000
customers, NU predicts that the equity release market will reach
£2.42 billion in 2013, double the £1.2 billion achieved in 2007. NU
estimates that the number of people opting for equity release will
have grown from 54,090 in 2007 to 115,617 in 2013. NU estimates the
number of equity release plans sold in 2013 will be 70,500, this
lower figure reflecting the fact that equity release plans can be
purchased on a joint (generally husband and wife) or individual
Pension buy-out boom stalls
Undoubtedly one of the biggest growth phenomenon’s in the UK
life industry in recent times has been the defined benefit (DB)
pension scheme buy-out market. Indicative of the growth pace Watson
Wyatt reported that deals valued at a total of about £7 billion
were executed in the first nine months of 2008, up from £2.9
billion in 2007 as a whole and £1.7 billion in 2006.
However, growth stumbled in the fourth quarter of 2008 and
according to consultancy Aon Consulting the buyout market is
expected to have fallen about £2 billion shy of the industry’s
earlier estimate of £10 billion for the full year.
The only bright spot in the fourth quarter was the buyout of
Thorn Electrical Industries’ Thorn Pension Fund by insurer Pension
Corporation in December. The largest ever UK pension insurance
buyout, it involved settlement of £1.1 billion of pension
liabilities and securing of benefits for some 15,000 scheme
“Without this deal the fourth quarter numbers would have been
very disappointing,” commented Paul Belok, a principal and actuary
“The bulk annuity market has inevitably been affected by the
financial tsunami hitting financial markets over the last few
months, said Belok. “Many pension schemes which were looking at the
bulk annuity market earlier in the year are now deferring their
review until markets have settled.”
Specifically, Aon found that a major reason for the slowdown in
the buyout market related to corporate bonds, one of the key asset
classes insurers use to back annuities. Aon noted that a lack of
liquidity and uncertainty around pricing and increased default risk
for corporate bonds had a knock-on effect on bulk annuities from
mid-September with some insurers who had previously been very
competitive increasing their pricing significantly.
However, even if market activity recovers, adequate industry
capacity will be a problem suggests a study released by Pension
Corporation in September 2008. In the study the insurer estimated
that existing capacity could support another £25 billion of buyout
transactions and that to meet anticipated demand, capacity would
have to grow by nearly £250 billion over the next three years.
This would in turn, estimated Pension Corporation, require the
life industry to bolster its total solvency capital by an
additional £30 billion within three years. A tall order in the
current capital market characterised by extreme investor caution
and low equity valuation multiples.