Macroeconomic Uncertainty is Likely to Constrain the Growth of the Whole Life Insurance Market in the UK

Thursday 22 August 2013, Amsterdam

Gross written premiums in the UK’s whole life insurance category fell by 57% between 2007 and 2012, although gained momentum in 2010, and resumed growth at 8% in 2012. The market is dominated by unit-linked products, while the popularity of unitized-with-profits and guaranteed acceptance plans for the over 50s also improved 2010 and 2012. Whole life insurance penetration represents 1.6% of the country’s GDP, and has remained significantly below its pre-crisis levels. Whole life insurance density also fell sharply, totaling a value of GBP384.1 in 2012.

Gradual economic recovery, increasing life expectancy and rising disposable income are expected to promote the demand for whole life insurance products over the next few years. Continued macroeconomic uncertainty is likely to constrain growth in the category and life insurers will face competition from the banking and wealth management sector offering savings and investment alternatives. A strong return to growth is not expected, with premiums only expected to grow at a CAGR of 3.5% between 2013 and 2017. Adverse factors such as prolonged low interest rates and regulatory changes will also affect new business volumes in the segment.

Growth in claims has been restricted
While the recession led to a surge in claims in the non-life segment, claims in the non-life segment, claims in the life insurance segment fell sharply in 2009, declining by 36%. Nevertheless, in line with an increase in policy surrender rates, life claims consistently exceeded premiums over the last few years, resulting in high loss ratios across the segment.

Distribution channels are evolving
Insurance brokers are the main channel for distribution of life insurance products in the UK. However, independent financial advisers (IFAs) are expected to face increased pressure since the Retail Distribution Review (RDR) was introduced. RDR implies that advisors can no longer take commission on sales of retail investment products, including life insurance policies, and instead, will have to charge their clients directly. The role of low-cost channels in securing new business will grow significantly over the next few years, with e-commerce and direct marketing expected to further dominate the distribution of guaranteed acceptance plans.

Low interest rates continue to threaten investment returns and profitability
The operating environment for UK life insurers has remained challenging. The decline in equity and property markets severely affected the profitability of the life insurance segment. Although capital positions of UK life insurers have remained solid, low interest rates are likely to further depress the industry’s earnings, resulting in reduced new business margins and an increased focus of the companies on maximizing cash flows in their back book of business.