Andrew Bulley, director of life insurance at the Bank of England, said insurer’s reliance on annuities in recent years mean many will now have to consider mergers to survive.
Prior to the Budget, Mr Bulley said annuities dominated the retirement income product market in the UK with insurers having about £240bn of net annuity liabilities at the end 2012, with the market having grown by 13 per cent that year alone.
Speaking at the All Party Parliament Group on Insurance and Financial Services at the Houses of Parliament, Mr Bulley said this is in contrast to static or falling sales in other traditional life insurance products.
Life insurance premiums in 2012 were £165bn, but claims and benefits paid, at £196bn, were significantly greater, Mr Bulley said.
He revealed analysis of the returns made to the Bank of England by life insurers indicates there have been net outflows from the life insurance sector in every year since 2008.
So, with with-profits books in run off, and protection business offering limited growth prospects and under margin pressure, Mr Bulley said annuities had remained in many respects the life industry’s unique selling point and a key source of differentiation from other asset managers.
While he felt predictions of a 90 per cent decline that were floated by market commentators following the Budget were too severe, he said many firms have reported falls of up to 50 per cent in annuity sales and therefore things will have to change.
Mr Bulley said: “It is likely that this situation will stabilise as the implications of the changes become clearer but it is likely that annuity sales will be permanently and significantly reduced as many customers choose either to take their money or move into alternative drawdown products.
“Insurers face an increasingly competitive landscape. Cash released from pension pots may find its way into new Isas, or the new NS&I Pensioner Bonds, or on to platforms by way of drawdown products.
“Insurers and the PRA are currently assessing the likely impact of the changes – we are having many conversations with insurers on this.
“It is a commercial matter for firms to determine whether they will change their business mix and the extent to which product innovation is needed.
“However, such changes will undoubtedly give rise to a fresh set of prudential regulatory issues and so we will be considering how the changed environment will affect firms and what actions are needed to mitigate the risks that arise.”
He said the Budget changes meant the industry could consolidate, which “may give rise to risks from the integration of different cultures and systems.”
