The UK’s life offices have long had an image as lumbering corporate giants, slow to change but offering a – relatively – safe place for one’s money.
But over the past two years, that image has slowly been changing. Several regulatory events, along with long-standing industry trends, mean the UK’s life offices have had to transform themselves as investors have developed a different relationship with their savings.
This process has hastened over the past few weeks with the news that Prudential, long seen as being slow to change, is to split in two and sell off its annuity book, and prior to this Standard Life Aberdeen began offloading its insurance business to Phoenix.
Against this background Aegon has also been turning itself into a platform-focused business while Legal & General has made disposals to refocus itself.
Trevor Moss, senior analyst at Berenberg Bank, says: “I think companies are facing up to the fact that they need to refocus their business and they’ve got capital supporting businesses facing in the wrong direction to where the industry is going. It’s waking boards up to the fact that they need to do something about it.
“I think it’s basic Economics 101; it’s focusing on what you’re good at. The Standard Life Aberdeen and Prudential decision are evidence of companies waking up to the realities they need to focus their business on what they’re good at and make the right returns on capital.”
A big catalyst for change has been Solvency II, which has changed companies’ relationships with their use of capital. Fundamentally, to prevent insurance companies becoming insolvent, the European directive required insurers to put aside more capital against their insurance contracts.
This has made insurance firms reassess the lines of business they are focused on. Mr Moss says: “It has identified the returns between capital light business and capital intensive business.”
In addition, according to Ned Cazalet, chief executive of Cazalet Consulting, it has focused executives’ minds on the risks they are taking on. “Solvency II has been a massive driver for all of these organisations to determine what risk they are holding and how they are diversifying that risk.
“There’s much greater visibility on how to run this stuff – there’s better reporting, better risk management, and this has contributed to companies being much more aware of the liabilities they’re exposed to.”
The other driver has been pension freedoms. Releasing people from the necessity of buying an annuity when they come to retire, has made many life offices rethink the need to offer annuities.
Prudential and Aegon have sold their annuity book, while Standard Life Aberdeen has sold its pension book and taken a stake in Virgin Money’s investment business. Other companies, however, have built up expertise in this area, with Rothesay Life buying a large part of the annuity business from Aegon and the whole annuity business from Prudential, and Phoenix Life doing the same with Standard Life Aberdeen.