UK Life Highlights 2006

Content

• Chapter 1 Introduction
  • What is this report about?
  • Who is the target reader?
• Chapter 2 Market Context
  • Introduction
  • Key findings
  • Life within the overall savings and investments market - where does it fit in?
  • Tax advantages of investment bonds
  • Taxation of part surrenders
  • Taxation of total surrenders
  • Life based investments are dominated by unit-linked bonds
  • Unit-linked bonds continue to benefit from their simplicity
  • Increasing investor confidence and attractiveness of Unit-Linked product now driving Unit-Linked growth is it still broken
  • Product innovations have increased the attractiveness of the Unit-Linked Bond product
  • Increased use of open architecture funds, along with the rationalization of providers' bond ranges, has seen an expansion of the investment bond concept
  • Product innovation is creating a more level playing field and is commoditizing the investment bond product
  • IFAs find all-encompassing product much easier to use and manage
  • Unit-Linked bonds can compete with the non-life market but the tax structure may limit future growth
  • The Non-Unit Linked market has become increasingly dominated by Distribution bonds
  • A number of factors lie behind the growth in Distribution bonds
  • The search for an alternative to With-Profits has focused attention on other cautious investments
  • Distribution bond new business has benefited from an increased range of providers and products
  • Guaranteed Equity bond new business has declined as investor confidence has recovered
  • IIncreased investo confidence has decreased the need for investors to purchase guaranteed products
  • However, some providers believe there us still room for growth in the market
  • With-profit bond new business has failed to recover despite new style With-Profits' strengthening returns
  • Improved fund performance has failed to inspire sales
  • New style With-Profits products are now the only With-Profits products on the market
  • Despite the negative publicity surrounding With-Profits bonds, their long-term performance remains good
  • Providers have reconsidered plans to rebrand With-Profits
  • New disclosure rules could provide transparency to the With-Profits market
  • Income & Growth Bond new business has remained low
  • Income & growth bonds generally seen as the most cautious investment, so recent confidence in the market has dented sales
  • The protection market is dominated by Term Assurance
  • New business premiums in the total term assurance market have grown by a compound annual rate of 3.1 per cent between 2001 and 2005
  • Prices of Term Assurance have fallen dramatically over the last five years
  • The increased commoditization of Term Assurance has made price even more important
  • Changes to longevity statistics have impacted the underwriting process and lowered cost of premiums
  • The underwriting process for Term Assurance has increased in complexity
  • Some providers are taking action to tighten underwriting
  • Doubts exist over the efficiency of teleunderwriting
  • The mortgage market is a key driver of Term Assurance sales
  • The mortgage market stabilized in 2005 which has halted growth in the Term Assurance market
  • However this slowdown is not likely to continue
  • Mortgage related Term Assurance has replaced endowment mortgages
  • Remortgaging and secured loans businesses look to be growing as well
  • Buy-to-let mortgages have increased in popularity
  • Churn of existing policies due to falling prices has boosted sales
  • Low cost of CII insurance has boosted sales of with rider Term Assurance
  • Decline in protection sales is driven by an acceleration in life investment sales
  • Price cuts are not having an impact on sales
  • There have been dramatic price cuts across the TA market
  • Critical illness is the next most important product in the protection market, while income protection lags behind
  • New business premiums in IP products are higher than in stand-alone CII products
  • CII's key success is as a rider product
  • Both CII and IP have seen declining policy sales
  • Poor sales performance hits both accelerated and standalone CII policies
  • Individual IP experiences declining sales
  • CII sales performance declines at a faster rate than for IP
  • Advisor preferences have been key to product success in Critical Illness
  • Advisors consider CII to be an easier sell than IP
  • Intermediaries are currently failing to push IP through mortgage sales
  • IFA strategies are focused on the CII rather than IP
  • The sales process for CII is more straightforward than for IP
  • CII is a straightforward product for bancassurers to sell
  • Underwriting an IP policy requires more information than for CII
  • Underwriting for IP is a long and complicated process
  • But rigorous underwriting for IP is justified
  • Advisors need to accept that underwriting is more complicated for IP
  • Consumers do not understand the Income Protection product
  • The benefits of IP are harder to communicate to customers than other protection products
  • Consumers do not understand the state benefits they are entitled to
  • Consumers do not understand the extent of their state benefits, and protection offered by employers
  • Statutory sick pay is less than people often realise.
  • Worringly, some consumers do not even know that IP exists
  • Some consumers mistake PPI for IP due to lack of clarification
  • Many do not understand what 'incapacity 'actually is
  • Lack of education and promotion is to blame for consumer knowledge gap
  • Moves have been made to demystify IP products
  • Substitution between other products has limited growth in IP
  • The size of the individual IP market is limited by the popularity of group products
  • There is a perception that IP and CII are substitute products
  • Providers have tended to focus on CII rather than IP
  • Providers have failed to boost the reputation of IP products
  • More recently, negative issues in the CII market have led to declining sales
  • The rising cost of CII has made IP comparatively more attractive
  • CII has attracted recent bad publicity while IP has enjoyed positive press
  • Industry commentators have been publicising the benefits of IP
• Chapter 3 Product Distribution
  • Key findings
  • IFAs still hold the majority share of Unit-linked bond sales
  • IFAs have switched their focus from With-Profits Bonds to Unit-Linked Bonds
  • Bancassurance Unit-Linked bond new business has experienced considerable growth
  • Single tied (other than bancassurance) and non-intermediated channels' levels of new business are negligible
  • Distribution of non Unit-Linked bonds is dominated by Bancassurers
  • Guaranteed Equity bonds drive the large non unit-linked market share enjoyed by the bancassurance channel
  • Guaranteed Equity bonds have replaced With-Profits as the main source of new business for bancassurers
  • Bancassurers now make up almost entire Guaranteed Equity bond market, along with large share of Income & Growth bond market
  • Depolarization has boosted the potential for bancassurance sales of life based investments
  • Increased product range and greater advisory capacity have helped bancassurers boost their share of the market
  • Impact of depolarisation likely to be greater on regular premium products than single premium
  • IFA sales of non unit-linked bonds have declined
  • lFAs remain a key channel of distribution as cautious investors value face-to-face contact
  • Distribution bonds have benefited from with-profits' fall in popularity amongst IFAs
  • Guaranteed Equity and Income & Growth bond new business is minimal for IFAs
  • The distribution of Term Assurance is highly varied
  • Direct sales forces and appointed representatives are the dominant distribution channel for individual TA including accelerated CII policies
  • The simplicity of Term Assurance has made it easy for advisors to sell
  • Non advice channels also benefit from simplicity
  • Money Marketing launches a 'No Advice, No Protection' campaign
  • Concerns about non-advice are highlighted
  • However does TA really need to be sold with advice?
  • Non-advice sales prevail for individual TA
  • More retailers enter the TA market
  • Boots tempts loyalty cardholders with extra points if they sign up for their TA product
  • Sainsbury's wins the Moneyfacts 2005 'Most Competitive TA Provider' Award
  • IFAs remain the key channel for distribution of both IP and CII products
  • All distributors are selling more CII than IP
  • CII sales through IFAs and DSF/ARs have fallen 2002-2004
  • All distribution channels failed to increase total new IP business sales from 2002-2004
• Chapter 4 The Future Decoded
  • The Unit-Linked market will continue to grow at a rapid pace
  • Unit-Linked bonds forecast to gain even greater market share
  • The non-unit linked market will stand at 755m APE by 2010
  • Distribution bonds will cement their place as the bond of choice in the non-unit linked market
  • Distribution bonds are the new product of choice for the cautious investor
  • Continued competition among providers should help drive new business
  • However, the increased competition from Unit-Linked products will limit the future growth available for Distribution bonds
  • IFAs believe Distribution bonds will have strongest growth out of all non-Unit Linked bond products
  • The decline of With-Profits is set to continue
  • New style With-Profits have so far failed to help restore flagging new business
  • However, the commitment of providers to the market should eventually see new business stabilise
  • Guaranteed Equity Bond new business is set to continue to decline
  • Continued stock market growth will harm Guaranteed Equity bond new business
  • Income and Growth Bonds see new business levels continue to fall then stabilize
  • Increased competition from Unit-Linked products will harm new business levels
  • Core group of investors will stay loyal to the product
  • The introduction of Pensions Term Assurance will boost the overall Term Assurance market
  • Mortgage related TA sales are forecast to grow by a compound annual rate of 1.6 per cent between 2005 and 2010f
  • Growth in sales of mortgage related TA is forecast as mortgage sales pick up
  • However stabilization in the equity markets will see intermediaries focusing more on investment products
  • Rebroking of Term Assurance products will slow as regulations are tightened and prices begin to rise
  • Customer need for protection products is becoming increasingly well publicized
  • Need for more efficiency and investment in technology as competitive pressure heightens
  • Pension Term Assurance (PTA) brings publicity and opportunities to the TA market
  • What is PTA?
  • PTA does have certain disadvantages
  • It will be possible to distribute PTA through a wide range of advisors
  • However concerns exist that PTA will simply encourage churning
  • Providers are preparing their PTA propositions
  • Providers are working hard to prepare advisors for the arrival of PTA
  • The naming of PTA products has caused some confusion
  • Level and decreasing TA on single life policies for PTA will be offered across the industry
  • What does the future have in store for Income Protection and Critical Illness?
  • Enhancing IP product features could boost product popularity
  • Time to go Hybrid?
  • Possible IP niche for blue collar market through Holloway Products?
  • Will Virgin launch an IP product on the back of new cancer product?
  • A increased focus on rehabilitation programs within the IP product offering could attract customers
  • Preferences of distributors may shift from CII to IP
  • Advisors may struggle selling CII if negative publicity continues
  • More providers will distribute protection products more widly through their websites
  • IFAs have a stable outlook on the future of the IP market
  • Bancassurers will boost market share and broaden the appeal and awarenes of protection products
  • The cost of IP is falling relative to CII
  • The cost of CII policies are forecast to rise, benefiting IP in its role as a substitute product
  • Techonological improvements in underwriting may save costs
  • Increased customer awareness of IP
  • Providers are developing new IP products that will better meet the needs of customers
  • Customer need for IP is becoming increasingly well publicized
  • Personal Finance Society (PFS) IP taskforce raise the profile of IP
  • Tighter regulations and definitions will drive changes in the market Income Protection and Critical Illness markets
  • The CII market will decline due to tightening of medical definitions and rising premiums
  • The ABI's 2005 consultation paper tightens regulations surrounding CII
  • Tighter regulatory regime will limit CII sales
  • Tighter regulations on the extent to which protection products fulfill customer needs will boost IP sales
  • Although the future looks bright for IP, it will still be some time before a we see a significant increase in sales
• Chapter 5 Appendix
  • Supplementary Data
  • Definitions
  • Income Protection
  • Critical Illness
  • ABI definitions of distribution channels
  • Independent Financial Advisors (IFAs)
  • Direct sales forces
  • Tied agents
  • Multi-tied agents
  • Bancassurance
  • Direct marketing
  • Telesales
  • Other
• Further reading
  • Datamonitor Savings & Investments SPP Reports
  • SPP writing team
  • How to contact experts in your industry
• List of Tables
  • Table 1: Inflows into the UK Savings, Investments and Life market 2001-2005, GBPbn
  • Table 2: Performance of average with profit fund against the FTSE from 2002-2006 (%)
  • Table 3: Comparative performances of best, worst and average With-Profits funds vs other funds as at 1 February 2006
  • Table 4: New business premiums in the UK term assurance market, 2001-2005, m
  • Table 5: New business premiums in individual protection 2001-2005, m
  • Table 6: Total number of premium sales for IP and CII policies
  • Table 7: All distribution channels have experienced declining sales of term assurance
  • Table 8: Percentage of new policies sold by distribution channel, 2002-2004
  • Table 9: IFAs and DSF/ARs perform poorly with CII sales, however the number of CII policies sold rose for the 'other' category, 2002-2004
  • Table 10: The number of IP policies sold split by distribution channels, 2002-2004
  • Table 11: Datamonitor forecast: Income and Growth Bonds, Guaranteed Equity bonds, Distribution bonds forecast new business, m APE, 2005-2010
  • Table 12: New business premiums in mortgage related and non-mortgage related TA, m, 2005-2010f
  • Table 13: Forecast new business premiums in the UK protection market 2006-2010, m
  • Table 14: Life market bonds new business, m APE, 2001-2005
  • Table 15: With-Profits new business vs FTSE, m APE, 2000-2005
  • Table 16: With-Profits and Unit-Linked new business, m APE, 2001-2005
  • Table 17: Investment bonds new business, m APE, 2005
  • Table 18: New Unit-Linked business levels by distribution channel, m APE, 2000-2005
  • Table 19: With-Profit & Unit-Linked new business vs the FTSE, m APE, 2001-2005
  • Table 20: Percentage market share by distribution channel, 2000-2005
  • Table 21: Top ten providers' percentage market share vs the rest of the market, 2000 & 2004
  • Table 22: Top five providers' percentage share of the market, 2000 and 2004
  • Table 23: Forecast new business levels for all investment bonds, m APE, 2005-2010
  • Table 24: With-Profits and Unit-Linked new business and market share levels, m APE and %, 2000-2004
  • Table 25: With-Profits and Unit-Linked new business and market share levels, m APE and %, 2005-2010
  • Table 26: Average With-Profits and Distribution bond asset mixes as at January 2006
  • Table 27: Guaranteed Equity bond new business, m APE vs the FTSE, 1995-2006
  • Table 28: Investment mix for life companies' With-Profits bonds, 2004
• List of Figures
  • Figure 1: Deposits are the dominant product in the UK long-term savings and investments
  • Figure 2: Unit-Linked bonds continue to dominate the life investment market
  • Figure 3: Distribution bonds now dominate the market
  • Figure 4: Average asset mixes for With-Profits and Distribution bonds
  • Figure 5: Sales of Guaranteed Equity bonds start to decline as the FTSE begins its recovery
  • Figure 6: With-Profits new business has slumped since 2001
  • Figure 7: With-Profits have failed to recover in line with the FTSE
  • Figure 8: Income and Growth Bonds have declined since 2002 and have settled to a low growth level
  • Figure 9: New business in both mortgage related and savings related term assurance has declined after a peak in 2003
  • Figure 10: The UK mortgage market: ten years of growth, 1994-2003
  • Figure 11: Mortgage gross advances declined in 2005 from the previous year, 2001-2005e
  • Figure 12: Mortgage related endowments have nose dived
  • Figure 13: The percentage of Term Assurance sold as a with rider policy has grown
  • Figure 14: The gap between the share of the life premiums through protection and sales through investments is growing once again
  • Figure 15: New business premiums in income protection is greater than that of stand-alone CII
  • Figure 16: Accelerated CII policies declined at a faster rate than standalone CII policies, 2002-2004
  • Figure 17: Sales of IP have fallen between 2002-2004
  • Figure 18: IFA's level of new business is on the increase
  • Figure 19: IFA market share has remained consistently high
  • Figure 20: Bancassurance have highest market share of all non Unit-Linked distribution channels
  • Figure 21: Bancassurance new business moves away from With-Profits
  • Figure 22: Bancassurers make up almost entire Guaranteed Equity bond market
  • Figure 23: With-Profits new business has slumped in favor of Unit-Linked
  • Figure 24: With-Profits have suffered a huge decline and Distribution bonds sales through the IFA channel have grown
  • Figure 25: Income and growth bonds make up a small share of Income & Growth and Guaranteed Equity bonds new business for IFAs in 2005
  • Figure 26: Direct Sales Forces/Appointed Representatives experienced a sharp decline in sales in 2003
  • Figure 27: Individual TA is the highest selling protection product without advice, 2002-2004
  • Figure 28: Distribution of CII and IP are similar however the 'other' category has been more successful at selling CII than IP
  • Figure 29: DSF/ARs faced a gradual decline in sales, while IFA sales performance sharply fell in 2003, 2002-2004
  • Figure 30: IFA IP sales fall quite dramatically in 2003, while DSF/ARs sales decline at a more gradual pace, 2002-2004
  • Figure 31: Forecast: Unit-Linked bonds will continue to dominate the UK life investment market
  • Figure 32: Unit-Linked market share and new business levels forecast to exceed peaks previously attained by With-Profits
  • Figure 33: Datamonitor forecasts Distribution bonds to continue to dominate the non Unit-Linked market into 2010
  • Figure 34: IFAs predict strongest growth for Distribution bonds
  • Figure 35: With-Profits new business is expected to continue to fall before stabilizing in 2007
  • Figure 36: Slight decline in Income & Growth bond new business
  • Figure 37: Pension TA is expected to increase total TA sales
  • Figure 38: New business premiums in the mortgage related TA market are forecast to grow by a CAGR of 1.6 per cent, 2005-2010f
  • Figure 39: Mortgage related TA sales are forecast to increase as the UK mortgage market grows, 2005-2010f
  • Figure 40: CII rider products are forecast to continue their domination of the CII and IP markets