A management consultancy has urged life insurers to provide advice and become the 'financial home' for the over-50s in order to reap the benefits from pension freedoms.
Consultancy Oliver Wyman estimates UK life insurers have the potential to add £7.5bn of annual cash generation and £100bn of shareholder value by 2021 if they move beyond pensions to provide a range of financial and older age services.
In a report out on Monday (23 April) the firm recommended insurers invest in technological advances, such as digital channels, data analytics and robo-advisory services, to broaden and deepen client relationships, reduce costs of serving clients and generate greater profits.
John Whitworth, Oliver Wyman partner and lead author of the report, said: "Life insurers must shift from their current narrow product focus to a client relationship-based proposition.
"In doing so, they have the potential to build client relationships that are stronger than those with retail banks, becoming the 'financial home' for the over 50s."
Some life insurers already own advice firms, such as Standard Life's 1825, but rival Zurich has recently exited their stake.
Oliver Wyman forecasts in 10 years' time the industry will hold £1,200bn of assets on insurance platforms and will be paying pensions of about £35bn a year.
And there are signs players are ready to take advantage of shifts in the retirement income market.
Standard Life restructured to a 'capital light' business by selling its insurance arm in February while Lloyds Bank announced in February a return to advice was imminent.
The bank aims to attract £50bn assets in two years by investing in several aspects of its business, including technology, intermediated business and in-branch advice.
Oliver Wyman believes the long-term prognosis for the UK life insurance industry to be "somewhat beige".
On the bright side, it has returned to growth in sales and dividends, and has survived the introduction of Solvency II but on the downside financial resources are slowly being depleted and the industry is over-reliant on profits from legacy businesses, the consultancy stated.
The consultancy found the products currently being sold (such as pension savings, annuities and protection) will not deliver enough profit to compensate for the run-off of legacy products.
But the consultancy stated more visionary insurance players could raise the industry bar by helping clients draw up a financial plan for their retirement.
The report stated: "This new breed of life insurer must evolve their core business models to extend way beyond the traditional sources of revenue they currently capture and adopt a customer-centric, rather than product-centric, value proposition.
"Far from being limited to life insurance, products and services propositions would include other financial services (such as banking and general insurance) as well as non-financial services products (such as recreation and long-term care)."
Currently insurers cannot provide advice unless they have the relevant regulatory permissions.
There is a clear distinction between guidance and advice, with advice typically being a personal recommendation.
But Prudential has already stated the current boundaries between guidance and advice were too restrictive.
In its response to the Work & Pensions' select committee's enquiry on pension freedoms in November the insurer called for a new form of guidance, which would allow insurers to give recommendations to their clients to ensure people who need help with their retirement planning are not missing out.
The committee itself stated in its report out in April that it wanted to see a new form of standardised drawdown to protect pension savers instead and for providers to be forced to offer the product.
Alistair Cunningham, financial planning director at Wingate Financial Planning, said: "Provider-led advice has historically not ended well.
"If the intention to provide a 'financial home' is to push more product, then this is unlikely to lead to good outcomes for the clients, and by extension, the providers."
carmen.reichman@ft.com
