Has George Osborne just provided the final blow to UK life insurance companies? While it may be too early to call it a knock out, it certainly counts as a knock-down. The removal of annuitization is the clearest signal in a series of moves (RDR, auto-enrolment, charge capping, FCA thematic reviews) that demonstrate the government’s intention to move to a new paradigm toward saving for, and managing income in, retirement. The message to the established Life Company is clear, with uncharacteristic bluntness: adapt or die...and fast!
Planning for a stable and predictable income in retirement just became a lot more complicated for the vast majority of customers despite the feeling of emancipation from the idea of being able to do what they want with their pension savings. Lamborghinis aside, without annuities there will be more choice, less guarantee, more risk and volatility, and perhaps as a result more unfortunate outcomes. No bother – what is done is done.
Traditional insurance companies have distinctive technical capabilities to make it easier for customers to manage an income throughout their retirement by applying sophisticated liability-based investment approaches and insuring against longevity. These capabilities have a critical role to play in the future of UK retirement; however, traditional insurance companies are desperately lacking in many core competencies that will be necessary to allow them to survive and thrive in the new paradigm. They have been slow to adapt to the digital world, and lack a customer mind-set, needs-based propositions and customer trust!
In order to succeed in the decades ahead, established life companies will need to re-discover what they are good at and find a way to truly become customer-centric. Traditional product push is out; trust activation, solutions, needs-based engagement, and nudge are in. Simply flooding the market with new “clever” absolute return funds will fall short.
Traditional insurance players that do not grasp how to build trust and intimacy, and harness digital and omni-channel management risk being intermediated “over the top” by non-traditional assemblers/information players and becoming a balance sheet utility at best.
What will this “new paradigm insurance company look like”? Four overarching imperatives stand out.
First, it will provide easy access to portfolio information through multiple routes to the company (i.e. mobile channels). There will be a bias toward direct customer engagement, alongside the traditional IFA model.
Second, it will blend multi-asset and risk underwriting capability to create a “do if for me” solution capable of dynamically managing needs through the life-cycle vs. at any one stage in it.
Third, it will develop strong guidance and advice capability to help customers engage with their retirement and demystify the art of financial advice. This will be done through the incorporation of digital technologies and simplification of the guidance process. Digital tools that help to explain and help customers understand trade-offs between risk and return and the probability of outcomes will become more important to activate trust along the way.
Fourth, it will be collaborative and open, offering clients social platforms to engage with other clients and advisors, and in some instances, competitors.
Insurance companies that can deliver the entire spectrum of these experiences stand the best chance of thriving in the new paradigm. If nothing else, the government has acted to enable customers; let’s hope for the benefit of those customers the industry can do the same.