Insurers forced to change policy as rivals run for cover

IF THE banks thought they were facing a hard time, they should take a look at the insurance sector. A new age of austerity and tougher regulation have combined with a demographic time bomb as Europe's baby boomers enter a potentially ill-funded retirement.

Britain's ageing population is seen as a "mature" market with fewer opportunities for life and pensions firms to make a decent profit. Therefore, firms are looking towards Asia for higher returns from among the region's booming number of independently wealthy individuals.

The shifting patterns of consumer behaviour are prompting insurance companies to revise their strategies, though not with entirely satisfactory results.

The Prudential's bid to expand into the lucrative Far East faltered after investors failed to back its $35billion bid to buy AIG's Asian business. Rumours that it would sell its UK business as part of the deal met with a mixed reception.

But what is also troubling UK pensions firms is an uncertain outlook for the sector. Plans to radically change the way pensions and investments are sold under the retail distribution review (RDR) will see commissions on the sale of financial products banned by 2012, undermining the current model of how independent financial advisers (IFAs) sell insurance firms' products to customers.

Also, European legislation in the shape of Solvency II will require those selling annuities to boost the levels of capital they hold in order to meet pension liabilities.

Trevor Matthews, the head of Friends Provident and a former chief executive of Standard Life's UK life and pensions division, believes that the market will be increasingly consolidated into fewer players. Last week, Friends Provident's owner Resolution paid 2.75bn for Axa's UK life and pensions business.

"There are too many players, this market needs consolidation. That is the theory and this (acquisition] is evidence," says Matthews.

Friends Provident, which itself was snapped up by Clive Cowdery's Resolution in 2009, is entirely modelled on consolidating UK pensions assets. It has a two-pronged strategy – to build internationally, particularly in Asia, and to "fix" the UK business.

Matthews says the chase for new business in the UK "doesn't make sense". Instead, he aims to grow a UK business that can offer its existing policyholders – 6.6 million and counting – other financial services such as Isas and sharesave schemes through company pension platforms.

Eamonn Flanagan, an insurance market analyst with Shore Capital, argues the market is in flux and companies are finding it difficult to make headway in the UK.

"With regards to the pensions market," says Flanagan, "it just needs the government of whatever colour to stand still for a few years and let people get a bit of stability. There is a theory that it is moving deck chairs.

"The getting out there and winning new business is much trickier."

He adds: "Now the FSA is looking at distribution – you are not allowed to charge commission. There's a lot of stuff going on. If you are trying to sell new business, it is pretty thankless."

Last week Matthews also signalled an interest in buying Aegon UK's bulk annuities business, to complete FP's target of growing assets to 10bn. Aegon said it was withdrawing from this sector as part of a radical shift in its focus to higher margin products – self-invested personal pensions (SIPPs) and new defined benefit workplace saving schemes.

Aegon aims to focus on higher margin business over the next three years, a process that will take 80m from its costs and mean hundreds of job losses in Edinburgh. UK chief executive Otto Thoresen says the changes are necessary as the firm responds to big changes in the market place – including the shift from final salary to money purchase pension schemes.

The result could have been even harsher for the Scottish-based operation. Alex Wynaendts, the Netherlands-based group chief executive signalled his displeasure with the UK division's performance and considered pulling out altogether. "We have made it clear that we are not satisfied with the current returns in our UK business," said Wynaendts, who said he saw a "trend towards a more direct engagement with the customer" raising questions over the firm's distribution model.

Aegon only entered the bulk annuities business in 2006 in a bid to soak up slack in the market left over by the giants in the business: Prudential and Legal & General. But the business no longer looks like a good bet after the firm failed to achieve a targeted 10 per cent market share.

Likewise, the firm paid top dollar for its distribution businesses – Positive Solutions and Origen – both of which made losses of 2m in the first quarter of 2010.

As the reshaping of the sector gathers pace, Standard Life last week announced a reorganisation to the way it sells its products, creating a new "take to market" division under its current managing director of distribution Paul Mathews. The move will support the firm's market leadership in the sale of SIPPs.