Mr Ryan described as “worrying” how life companies believed they stood to gain from the RDR and that demand for their products would increase.
“Our view is that this is wrong,” he said. “It seems very likely to us that new business volumes in the UK will decline, and sharply in some areas.”
Mr Ryan admitted that life company margins in the “real cash world” ought to increase once internal excess capacity for processing new business has been removed.
It was Investec’s view, he added, that to get to that stage may involve “some pain”.
Mr Ryan said that in the medium term the new legislation will bring good news for life companies – the fact that culturally they have been geared to selling new business, means as a consequence there will be a cost over-run for a couple of years while new business volumes reduce and capacity is removed from life insurers’ processing capabilities – meaning that the short term view is, however, not so positive.
He said: “It is impossible to gauge how well prepared life companies are for this change as no data has been released by individual companies about their plans in this area.”
So what is the answer? The key, according to Investec, is for life companies to escape the “self-imposed tyranny” of overpaying for new business.
Mr Ryan said: “While we anticipate volumes in areas such as regular premium pensions business will fall, profitability should rise sharply. The current situation is that life companies often pay significant sums of commission to the sales agent upfront.”
He continued: “Cleverly, the life companies will claw back this commission on a pro-rata basis if the policy lapses in its first three years. Typically, after three years a financial adviser would not be subject to any claw back on the commission already paid. A cynical, commission-hungry independent financial adviser could then persuade his client to lapse the regular premium pension product and take out a new one with a different provider. Given the significant up-front costs a life insurer has in selling something like a regular premium pension product such as administration, reserving, marketing costs and so on, it seems likely that many providers did not budget to break even on a sale like this for 10 years. A reasonable assumption if the product is a pension policy with a 20 or 30-year life. The problem is that in the real world more than half of all regular premium pension products lapse by the fourth year.”
