The UK insurance industry is one of the most mature in the world. The industry generated the largest gross written premium in Europe in 2012, and the third largest in the world after the US and Japan. However, like other developed Western and European nations, the UK insurance industry was affected by the global financial crisis. The gross written premium rose from GBP198.3 billion (US$308.9 billion) in 2009 to GBP206.0 billion (US$320.0 billion) in 2013. The slow growth can also be attributed to slow economic growth, rising interest rates and property prices, and competent public healthcare system.
The country also recorded one of the highest insurance penetration levels at 12.2% in 2013. Life insurance was the largest segment, accounting for 69.3% of the total written premium. Following the financial and subsequent debt crisis, the segment recorded slow growth in demand from 2011. This was supported prominently by the group life insurance sub-segment, improved foreign trade dynamics generating written premiums from US and other countries, better access to credit, and rising salaries. The segment grew by a CAGR of 0.4% to reach GBP142.7 billion (US$221.7 billion).
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Non-life was the second largest segment, accounting for 27.3% of gross written premium, followed by personal accident and health with the remaining 3.4%, or GBP56.3 billion (US$87.5 billion), driven by infrastructure development, passenger car sales, and exports.
The industry is highly competitive, with more than 1,200 active domestic and foreign insurers. Of these, 285 were life insurers and 976 were non-life and composite insurers. Insurance remained fragmented, with the leading 10 life and non-life insurers accounting for 78.7% and 62.0% of their segments’ gross written premiums respectively. Rising fraud and claims, and an expected increase in interest rates and property prices, will present challenges over the next few years.
The Financial Services Authority (FSA) was split into two regulatory bodies in April 2013: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) under the Financial Services Act 2012. Investment banks and insurers will be prudentially regulated by the PRA, whereas the FCA will regulate conduct. Both bodies are responsible for the regulation of the industry. The PRA works as a subsidiary of the Bank of England (BoE), and the FCA works with the Financial Policy Committee (FPC). The regulatory bodies were established to ensure regulatory protection and decrease regulatory failures.
With improvements in the UK’s economic conditions, access to credit, construction expenditure, automobile industry demand and GDP growth projections, the overall industry is expected to grow to GBP234.2 billion (US$389.0 billion) in 2018.
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By GlobalDataSlowed growth
The decline in consumer confidence following the financial crisis, the sovereign debt crisis in the eurozone and a decline in asset values, slowed the growth of the life segment significantly. Rising unemployment and an increasing consumer preference for alternative investment options decreased demand for individual life insurance products. However, factors such as an aging population, an increase in per capita annual disposable income and government initiatives to develop a stricter regulatory regime are expected to boost the segment.
Gender-neutral pricing
The Court of Justice of the European Union (CJEU) passed the Test-Achats ruling in December 2012 which bans the use of gender as a risk factor when calculating insurance premiums. Consequently, women will no longer be charged lower insurance premiums than men. The prices of life insurance products, particular those relating to income protection and retirement such as annuities, rose. The life expectancy of women in the UK is high at 82.5 years, compared to men at 78.2 years. The increase in annuity premiums was to avoid the imbalance of annual pension receivable for men and women due to women’s higher life expectancy.
Implementation of the Retail Distribution Review
The Retail Distribution Review (RDR) is a government initiative designed to increase consumer trust and confidence in insurance products and services. It was implemented by the FCA in December 2012, and includes measures designed to implement professional standards for insurance advisers, as well as regulate both commissions earned and fees paid to financial professionals. The regulator introduced a ban on commissions and expenses to control the mis-selling of products.
In the short term, the RDR will possibly affect the growth of the life segment due a reduction in the number of Independent Financial Advisors (IFAs), which account for much of the UK life segment’s distribution. Ernst & Young estimates that the number of advisors has dropped from 28,000 in 2010 to 20,000 in 2014. However, due to improvements in the quality of advice given to consumers, and a reduction in the mis-selling of financial products, consumer confidence is expected to improve.
Demographics
In 2013, the UK had a population of 63.4 million; approximately 17.3% of this aged 0-14 years, 65.4% aged 15-64 years, and only 17.3% aged over 65. It is expected to reach 65.1 million in 2018. According to the IMF, the population aged above 65 years is expected to reach 18.2%, at 11.8 million in 2018. With this group favouring investment in long-term savings products, and most of the population belonging to the working age bracket, strong growth in the segment is expected to continue.
The average life expectancy in the UK rose from 79.6 years in 2009 to 80.3 years in 2013, driving the pension category during the same period. Life expectancy is expected to reach 80.9 years in 2018. High life expectancy will also spur increases in premiums, as it is a factor for calculating life insurance prices.
Lower margins
In 2014, the government announced initiatives on pension plans and an increase in regulatory scrutiny of customer treatment by insurers. The FCA plans to investigate to control the mis-selling of annuity products. It will review whether customers genuinely understand what they are buying, whether it provides reasonable value, and whether it is in their interests. This is expected to affect profits, especially for individual annuity or pension plan providers. The UK population is expected to avoid individual annuity plans and instead use the capital as cash. However, this will not affect higher-rated insurers as they can counter the negative effect by diversification into other product areas.
Interest rate hike ahead
In June 2014, the BoE announced that it expects to raise interest rates for the first time since 2007. The country’s lending interest rate, presently at 0.5%, is expected to rise by 0.25 percentage points within the next year. Markets are forecasting interest rates offered by banks to reach 2.0% in 2017. However, investments are only expected to return limited margins, as banks have no desire to attract deposits according to James Blower, director of Shawbrook Bank. SMEs, which were seen by many as powerful drivers during the economic recovery, are expected to be affected by the rise in investments, and are expected to face difficulties in securing funding and invoicing terms from clients, which will decrease their optimism over future plans. This is expected affect business insurers such as Axa, and slow the growth of the group life sub-segment.
Outlook
The financial crises had a major impact on individual and linked-business insurance products, decreasing their gross written premiums during the review period. However, due to government actions and regulatory changes, the overall life segment increased at a CAGR of 4.0% during 2011-2013.
Group life insurance recorded positive growth when compared to individual life insurance, due to the high volume of overseas business. Around 26% of the UK insurance industry’s written premium in 2012 was through overseas business, with the US being the main contributor. The group life sub-segment grew to reach GBP81.2 billion (US$126.1 billion) in 2013. Group whole life insurance grew significantly at a CAGR of 51.8% to reach GBP6.6 billion (US$10.2 billion) in 2013. Group superannuation insurance accounted for 91.9% of the sub-segment’s gross written premium in 2013, valuing GBP74.6 billion (US$115.9 billion).
Individual life insurance declined from GBP74.3 billion (US$115.8 billion) in 2009 to GBP61.5 billion (US$95.6 billion) in 2013. Apart from low confidence in investments, individual life was affected by an increase in regulatory scrutiny from the FCA. The regulator investigated the treatment of customers by insurers to control the mis-selling of annuity products with insufficient information. This affected profit margins, especially for individual annuity or pension plan providers. The individual pension category contracted to GBP43.2 billion (US$67.1 billion) in 2013, while the general annuity category fell to GBP1.1 billion (US$1.7 billion).
In 2014, the UK government announced changes in the pension regime, including giving workers more control over their pension funds after retirement. This is expected to impact the purchase of annuities and reduce longevity risks at pension schemes.
Following the decision, pensioners are expected to reduce investments in pensions, and instead use the capital as cash in hand. This will lower margins for insurers, affecting investments in infrastructure and corporate bonds. To overcome this, insurers have to develop new products for retirees who do not require annuities. Mergers and acquisitions will be another key driver the life segment, which will also face challenges from the implementation of Solvency II. All insurers are expected to review and reconsider their business strategies as a result. In addition, UK life insurers are setting up new subsidiaries in Asia, where there is substantial scope for growth.
Distribution channels
The distribution network of life insurance products in the UK is prominently made up of insurance brokers, agencies, direct marketing, e-commerce and bancassurance.
Insurance brokers were the largest distribution channel for life policies, accounting for 73.6% of the new business gross written premium in 2013. The number of policies sold through brokers increased from 3.7 million in 2009 to 5.5 million in 2013. However, the number of brokers decreased from 5,049 in 2009 to 4,572 in 2013. Life business generated through brokers falls under the remit of PRA and FCA regulations, which require brokers to register with the Financial Services Compensation Scheme (FSCS) and Financial Ombudsman Service (FOS). This ensures that losses from insolvency or misfeasance will be compensated. Professional indemnity insurance is mandatory, and every broker is required to deal with at least four insurers, while not deriving more than 35% of their commission from any one insurer.
The second largest distribution channel was agencies. The new business gross written premium through agencies decreased from 20.9% in 2009 to 17.1% of in 2013. In terms of value it decreased from GBP11.6 billion (US$18.1 billion) in 2009 to GBP11.2 billion (US$17.5 billion) in 2013. This was due to the decrease in the number of agencies after the implementation of the RDR, which bans commissions on investment business advice and directly affects agency margins. However, agency networks are expected to have close relationships with insurers and pension providers, and operate according to the interests of the insurer for which they work.
Direct marketing was the third largest distribution channel, accounting 4.6% of the new business gross written premium. The channel improved its share from 3.3% in 2009 to 25.6% in 2013 as insurers aimed to market products directly to reduce costs. As such, the number of direct marking distributors increased from 56,160 in 2009 to 78,346 in 2013. The number of policies sold increased from 184,922 in 2009 to 345,512 in 2013.
E-commerce is another important channel for distributing life products in 2013. It generated 2.5% of the new business gross written premium, closely followed by bancassurance. The number of policies sold through e-commerce increased from 14,367 in 2009 to 188,389 in 2013. The number of distributors of life products through e-commerce increased from 2,847 in 2009 to 3,059 in 2013. The share of bancassurance declined from 9.1% of the life gross written premium in 2009 to 2.5% in 2013, and is expected to reach 2.4% in 2018.
