UK life insurers' profits may fall by a quarter by 2025 if they do not respond to market dislocations and disruptive forces, according to Deloitte.
Profit pools in the UK life sector will grow from £6.6bn ($9.53bn) to £8.1bn in the next 10 years, the consultancy estimates, thanks to defined contribution (DC) pensions, bulk annuities and drawdown.
However, life insurers will lose a major share of the market if they fail to capitalise on the changes in retirement markets or do not respond to the competition posed by low-cost, high-tech asset managers.
In a report, Growing the retirement opportunity, Deloitte says insurers face "a prolonged period of unprecedented market dislocation which they cannot afford to ignore," citing auto-enrolment, the Retail Distribution Review, pension freedom, an ageing population, and "consumers' preference for leaving their pensions invested, rather than buying an annuity", as factors that will reshape profit pools over the next 10 years.
The consensus is that asset managers and banks will benefit from the market dislocations, not life insurers. But Deloitte believes that life insurers can muscle in as they have advantages over their competitors, such as access to many corporate and individual pension customers and deep actuarial expertise. They must go the extra mile though, through the acquisition of new skills and more risk-taking.
The shift within the UK life insurance profit pools will come from several factors: auto-enrolment, which will spur growth in DC pensions; pension freedom, which will grow drawdown at the expense of annuities; and the ageing population, which will lead to growth in bulk annuities.
"Corporates will continue buying bulk annuities to mitigate the risk of providing pensions to former employees who live longer than expected," the report notes. "Demand for bulk annuities is likely to increase when interest rates rise because higher rates will reduce scheme deficits and make bulk annuities more affordable." Furthermore, the protection market may well stagnate.
The life insurance industry is also vulnerable to disruptors. They include the likes of low-cost international asset managers, who have already taken a big part of the market in the US, and on the side of innovation, the need for cheaper advice and simpler products, as well as highly efficient platforms that connect buyers and sellers.
"We estimate that if life insurers do not respond to threats of disruption, they could lose up to a quarter of profits by 2025 to asset managers, banks and other new entrants," the report states. "In this scenario, life insurers' total profits would fall by approximately £1bn compared to today."
So how can life insurers ensure they do not lose out? Deloitte recommends they focus on the following:
- Leverage strong ties to employers to continue dominating the DC pension market. To do so, they should enhance their investment and marketing capabilities for retail investors.
- Exploit actuarial expertise and risk management skills to manage risk. A degree of re-risking may be called for to convert this advantage into market success.
- Innovate business models, including low-cost advice to customers (through automation or advice supplied in the work place in collaboration with employers), and digital technology. "Life insurers have an opportunity to make protection more popular by providing it through connected devices, such as smartphones, smartwatches or fitness bands," the report adds.
To take advantage of the disruption, insurers need to be proactive and use their strengths in key areas including M&A to reposition the business portfolio, digitalisation and updating operating models to build retail marketing, and risk management skills, according to Deloitte.