The turmoil currently afflicting the UK life and pensions industry may soon begin to seep into the Irish market, forcing brokers and life assurance companies to reassess their business models.
Addressing an audience of more than 400 financial advisers at the Friends First "Tomorrow's World for Financial Advisers" conference on Wednesday, leading life and pensions expert Ned Cazalet said that players in the UK life assurance market were currently experiencing "a lot of pain". "Some of it is coming your way," he warned.
Cazalet drew several parallels between the two markets which indicate that the challenges facing UK life assurance companies may well spread to Ireland. Historically low inflation in the UK translated into low bond yields and reduced returns on long-term investments, which in turn made it difficult for life assurance companies to deliver value for money to the consumer. Ireland is likely to experience a similar pattern, as inflation is also "in historically low territory" here, he said.
The UK life industry is also characterised by very high levels of "churning" or customer switching, to the detriment of profitability. "This is a real problem for life companies," he said.
Huge amounts of time, effort and money is spent chasing new customers, while existing business is "going off the books at a rate of knots". So new business and turnover is often deceptively high, while the life assurance company is losing money.
Although not as extreme as in the UK, this trend is very much evident in the Irish market. For example, approximately 25 per cent of regular premium pension schemes lapse each year. Only a small proportion of this can be explained by customers retiring and claiming their pension - the rest is due to churning.
A number of UK life offices are now starting to push a new pricing strategy known as "factory gate pricing". Instead of the life assurance company paying a commission to brokers, the customer makes an upfront commission payment in addition to the price of the product itself. Not only does this make the cost to the customer more transparent, it is hoped the psychological effect of making this upfront payment will deter consumers from switching.
Although they may be sailing into choppy waters, if brokers adopt a business model that provides consumers with value for money, they will be able to weather the storm. Getting their business model "on the right track" will require a lot of hard work, he said, but it will be worthwhile given the growth potential of the market.
Also speaking at the conference was Dr Patrick Dixon, who is ranked as one of the 20 most influential business thinkers. Dr Dixon said that the life and pensions market is set for significant growth, but warned that the lack of consumer trust in financial advisers represents a "massive crisis". Independent financial advisers should be required to provide customers with a complete list of all products that they sell together with commission rates, rather than just disclosing the pricing structure of the product that they are recommending, he said.
The danger of commission-based advice is that it can create a temptation to oversell. Truly independent advice can only be guaranteed by fee-based financial advisers, he said, where the consumer pays regardless of whether they actually buy a product or not.
However he noted that consumers are reluctant to pay for fee-based advice and said that there is a need to "educate the market" and that this is an issue that needs to be addressed at industry level.
He also warned financial advisers of the reputational risks that come with the rise of internet chatrooms and bulletin boards. The availability of financial information and news on the internet has also made consumers more impatient, so advisers must be able to respond to their needs more quickly.
