Aggregate U.K. market demand for with-profits funds has been in decline for several years. The benefits of simplification of a significant proportion of existing funds, most of which are already closed to new business, are becoming harder to ignore or defer.
With the notable exception of a couple of providers, the U.K. with-profits market has become something of a thorn in the side of most insurers over the last few years. The majority of the funds that responded to the Financial Conduct Authority’s (FCA) recent data collection exercise, as part of its planned thematic review of with-profits business over the next few months, are closed to new business. Of those remaining open, most are writing insignificant volumes of new business.
At the root of most of the market’s problems is a mixture of expensive residual product guarantees and options, public concerns about the transparency of products, onerous costs and governance requirements – all exacerbated by low interest rates affecting investment returns. For funds in run-off, where many of the costs are fixed, these issues escalate over the run-off period.
And while the FCA’s intentions for a thematic review aren’t fully known, the sense is that the fairness of projected expense levels and the management or compromise of guarantees and options will receive intense scrutiny. Consequently, 2018 seems set to be a pivotal year for the future management of with-profits business.
Momentum for change
To find out more about companies’ plans, we recently concluded a supplementary survey and analysis1 of a substantial portion of the funds included in the FCA data exercise. Our analysis confirms that more companies have their sights set on sustainable solutions to the market’s current ills.
With Solvency II becoming more business as usual, many companies say they’ll have greater capacity to look at more strategic activities, including management of their with-profits funds and in particular:
- Ways to achieve more equity across different groups of with-profits policyholders as funds run off
- Opportunities to better engage with customers on more modern, transparent products
- The possibility of allowing pensions’ policyholders greater access to pensions freedom
- Whether with-profits is core to their strategy and, if not, solutions other than retain and run off
- Tackling the numerous challenges associated with ‘gone away’ policyholders
- Operational simplification to reduce the level of operational expenses
Anticipating the FCA review, product simplification and fund simplification, along with the possible compromise of costly guarantees and options, are in the spotlight. Although such measures have been considered by many companies in the past, there’s only been a limited number of actual examples – largely involving smaller funds – that have come to fruition. But the case for simplification now looks more widely compelling.
Finding the ‘sweet spot’
Simplification can take many forms, ranging from more simple options, such as expense agreements, outsourcing or communications exercises, to the more complex merger of funds and conversion of with-profits policies to unit-linked or non-profit policies. The choice of the best option will differ across companies depending on the individual policy and fund characteristics and the strategic options available to the company.
Whichever route companies take, the natural inclination is to believe that a simplification exercise only serves insurer interests. But there are precedents that illustrate that’s not the case. Aside from the fact that regulators exist to prevent a unilaterally beneficial outcome, if done well simplification should aim to hit a “sweet spot” that balances the interests of all three main sets of stakeholders.
For policyholders, it means a solution that provides greater flexibility, transparency and better policy outcomes. For their part, both the FCA and Prudential Regulation Authority are interested in seeing companies that can remain solvent and provide products that remain appropriate to customers’ needs. And for the insurer, it’s reasonable to expect the solution to offer the benefits of reduced complexity, operational expense and management time. The key point is that, with sufficient preparation and specialist expertise, these objectives can often intersect and overlap.
More sympathetic regulators and the potential synergies that may exist across numerous funds offer the window of opportunity for the “triple win” that many insurers and stakeholders are increasingly looking for.
1. Available to participants only, unless with express permission of Willis Towers Watson.
Trevor Fannin is a director in the life insurance risk practice at Willis Towers Watson.