asc-pre-can traditional face-to-face selling survive ... · life insurers have less flexibility...

© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt

CAN TRADITIONAL FACE-TO-FACE SELLING SURVIVE AND PROSPER IN THE NEW REGULATORY ENVIRONMENT?

Andy CherkasTillinghast

2004 Life Convention7-9 November

EICC Edinburgh Scotland


Doom and gloom over face-to-face distribution?

■ Do you recognise these comments or observations?

■ Direct sales forces are dead, they will always be uneconomic■ Low cost stakeholder style charging will increase and limit

further available commission■ The with profit bond market has tanked, never to return■ The housing market is slowing, leaving distributor firms with

holes in their income■ The scramble for multi-ties is on, but the industry cannot

afford more incentives and commissions; it’ll end in tears■ Life insurers have less flexibility than ever to subsidise or

bail out inefficient distribution■ Regulators are determined to create a market for advice and

their actions in so doing will turn people off going to advisers

■ IFAs are old, tired, too small and undercapitalised


A hypothesis:survival and prosperity: yes, but not as we know it!

■ Traditional, mass market face-to-face distribution will remain under pressure for all but the best relationship builders

■ The Basic Advice Sandler regime will not make much headway

■ Pensions developments will create substantial new, economic business opportunities for distributors who adapt;■ But the segmentation, scope and standards of advice will

need to be increased substantially■ Life companies will be challenged in developing their

propositions as manufacturers


Investment specialistsCorporate pensions specialists Mortgage brokersGeneralists

NationalEBC Regional Networks Bank IFAs

IndependentNon network

Corp-orate

Accou-ntancy

ProviderIFAs

First, what do we mean by face-to-face distribution?

“Advice/product

proposition”

Direct offer(Ex

only)

IFANarrow panel

Best ofBreed

Basic advice

(Sandlerproducts)

Multiple products & providers

IFAWhole market

Full advice

Direct sales

INDIVIDUAL, RETAIL MARKET


First, what do we mean by face-to-face distribution?

“Advice/product

proposition”

Direct offer(Ex

only)

IFANarrow panel

Best ofBreed

Basic advice

(Sandlerproducts)

Multiple products & providers

IFAWhole market

Full advice

Direct sales

Provider relationship

Singletie

Whole-saler

Multiple ties

Single or multiple

ties

Multiple ties

Whole-saler

Single tie +

gap fill


Customer segments(simplified)

Self-directed

Middle income HNWMiddle

incomeMass

affluent

CURRENTLY 50,000 DISTRIBUTORS


We all know how resilient IFAs have been.Will they continue to be so?

Distribution mixIndividual business by APE

010

20304050

607080

90100

94 95 96 97 98 99 0 1 2 3

IFA Tied Direct Other

Distribution mixGroup business by APE

010

20304050

607080

90100

94 95 96 97 98 99 0 1 2 3

IFA Tied Direct Other


There remains a fundamental preference and need for face-to-face support in more complex areas

■ But can we take this for granted?

Require:• Advisory capacity• Advisory reach• Channel

management• Complex product

manufacturing capability

• Risk management

Complexity of financial need

Need for advice &

endorsement

HighLow

High

Low

Deposits

Pensions

Mutual funds

In retirement

Life wrapped

bondsProtection (basic)

Advisory portfolios

Wealth management


Basic advice regime under Sandler:not an inspiring picture for “worksite”

A more realistic picture of profitability?

Projected Internal Rate of Return (IRR) Worksite Model

Central Treasury

estimate on 1% AMC

1.5% AMC

for 10 yrs

"Realistic" estimate

+3.5%

IRR%

0

5

10

15

20

15.9%

19.4%

9.5%

Source: Tillinghast analysis based initially on HM Treasury assumptions and Tillinghast’s view of more realistic assumptions


4.3%

75% F2F

5.0%

->100bp

6.9%

25% F2F

11.2%

Prem+25%

12.6%

Lapse-25%

20.6%

SH costs-25%

Impact of varying business profile on "IRR run rate“No intermediary involvement; “Stakeholder rich” product mix

0%

5%

10%

15%

20%

75% SH Mix

Basic advice regime under Sandler:but some worksite permutations are economic

Source: Tillinghast analysis


4.3%5.0%

6.9%

11.2%

12.6%

20.6%

3.4%3.9%

5.6%

9.3%

10.8%

16.7%

0%

5%

10%

15%

20%

75% F2F ->100bp 25% F2F Prem+25% Lapse-25% SH costs-25%

75% SH Mix IFA @ 50% remote

Basic advice regime under Sandler:but some worksite permutations are economic

Impact of varying business profile on "IRR run rate“Showing impact of intermediary involvement; “Stakeholder rich” product mix

Source: Tillinghast analysis


Basic advice regime under Sandler:not a happy picture for retail banks

A more realistic picture of profitability?Projected Internal Rate of Return (IRR) Bancassurer model

0

5

10

8.4%

+2.9%

IRR%

0

5

10

8.4%

2.1%

11.3%

Central Treasury

estimate on 1% AMC

1.5% AMC

for 10 yrs

"Realistic" estimate



Basic advice regime under Sandler:No priority for this market within retail banks

Minimum premium sizes to make a contribution to fixed and developmental costs

Break-even Case Size – Bank Channel

Savings Pensions

Scenario

AMC 1.5% for 10 years

“Realistic”

Monthly £

48

94

Single £

2,091

2,911

Monthly £

67

116

Single £

2,468

3,113



Disclosure of commissions (“The Cost Menu”)will create confusion at first . . .

Initial only50% of your first 12 payments

25 year term

Example 3:Personal and Stakeholder Pensions

Initial and Renewal

Initial, Renewal and Trail

Commission Shapes

37% of your first 12 payments, then 2.5% of all payments from month 13

25 year term


25% of your first 12 payments, then 2.5% of further payments and 0.25% of your fund each year

25 year term


The market averageExample term or age

Monthly ProductsTable 1: Commission if you pay monthly


... and create pressure to standardise commissions

100%

150%

200%

250%

50%

300%

350%

400%

450%

% of m

arket average

SINGLE PREMIUM

Collective investment

InvestmentBond

Annuities Incomedrawdown

Pensions

REGULAR PREMIUM

100%

150%

200%

250%

50%

% of m

arket average

Collective investment

Wholeof life

Pension 10 Pension 25

Source: Tillinghast analysis of range of “Menu” outcomes from data supplied by over 20 providers

Wide variation in disclosed Menu commissions


Near term trends and prospectsfor distributors look far from rosy

Life/pensions APE £bn

0

2

4

6

8

10

12

2000 2001 2002 2003

Protection Life Pensions

Gross UT sales APE £bn

0

2

4

6

8

10

12

2000 2001 2002 2003

Retail Institutional

At best, a stagnant new business picture


Near term trends and prospectsfor distributors look far from rosy

The staple diet of WP Bonds is at an end

Single Premium Life ProductsAPE 2000-03: £bn

0.0

0.5

1.0

1.5

2.0

2.5

2000 2001 2002 2003

With profits

Guaranteed equity

Income and growth

Unit-linked


Com

mis

sion

Agency profit contribution vs commission

Profit contribution

Illustration of value by IFA firms (cumulative)(values changed from client case)

0%

50%

100%

150%

200%

250%

0% 20% 40% 60% 80% 100%

Percent of cases (by IFA)

Perc

ent o

f val

ueVariations in profit contributions channels are huge. Do you know yours?

Illustrations of variations in profit contribution within channels

IFA COMPANYIFA COMPANY DSF PERFORMANCEDSF PERFORMANCE


The biggest driver for change and hope for (distributor) prosperity is Pensions Simplification

■ Substantial flow of funds into “retail”, packaged products

■ Customer segments and needs are ideally suited to –and require – face-to-face advice


Substantial flow of fundsinto “retail”, packaged products

Current UK“Pensions” Assets (£900bn)

Personal/StakeholderPensions

OccupationalDB

OccupationalDC

Personal/StakeholderPensions

OccupationalDB

OccupationalDC

Future (10-15yrs)UK “Pensions” Assets

Source: Tillinghast estimates


Customer segments and needs areideally suited to face-to-face advice

ProtectionProtection

• Life cover via the pension plan• Reduction in premiums due to tax relief• Tax relief on unlimited levels of

dependants’ pension on death

• Life cover via the pension plan• Reduction in premiums due to tax relief• Tax relief on unlimited levels of

dependants’ pension on death

Small business ownersSmall business owners

• Dramatic tax benefits• Move personal and business assets

into pension plan before retirement• No need ever to buy an annuity• Inheritance tax mitigation

• Dramatic tax benefits• Move personal and business assets

into pension plan before retirement• No need ever to buy an annuity• Inheritance tax mitigation

Executives & EmployeesExecutives & Employees

• Executives: Alternative vehicles to pension & continuous monitoring & advice around the cap

• Employees: DB to DC, developing direct relations via worksite, use of ISAs

• Executives: Alternative vehicles to pension & continuous monitoring & advice around the cap

• Employees: DB to DC, developing direct relations via worksite, use of ISAs

At and in retirementAt and in retirement

• New style investment vehicles that maximise retirement income

• Drawdown becomes the primary option• Tax free cash uncoupled from taking

income

• New style investment vehicles that maximise retirement income

• Drawdown becomes the primary option• Tax free cash uncoupled from taking

income


Is this the ideal product structure? We needto redefine what we mean by a pension product

“LIFETIME INVESTMENT ACCOUNT”

Drawdown facility

ISA

Shares

Cash

Bonds

Mutual Funds

Lifewrapped

Protection

Cash

UL Funds

WP Funds

Savings Pensionstransfers

Tax-freecash

Non-tax privileged

Shares

Cash

Bonds

Mutual Funds

Pension wrapped

Cash

Property

Protection

Bonds

Mutual Funds

Annuities


Drawdown facility

ISA Lifewrapped

Savings

Tax-freecash

Non-tax privileged

Shares

Cash

Bonds

Pension wrapped

Cash

Annuities

Shares

Cash

Bonds

Mutual Funds

Protection

Cash

UL Funds

WP Funds

Property

Protection

Bonds

Mutual FundsMutual Funds

Pensionstransfers

The advice proposition needs to be upgradedand upskilled to generate a decent income


Assetallocation: throughout

Timing;managing the cap

If and when

If and whenHow much

How much

Advice required


WRAP PLATFORM

ADVICE TOOLS

Who will supply and own the infrastructure?Will it be the distributors themselves?


Drawdown facility

ISA

Shares

Cash

Bonds

Mutual Funds

Lifewrapped

Protection

Cash

UL Funds

WP Funds

Non-tax privileged

Shares

Cash

Bonds

Mutual Funds

Pension wrapped

Cash

PropertyProtection

BondsMutual Funds

Annuities


Group DC market: an opportunity tobuild genuine relationships, but for whom?

PROVIDER – WHAT ROLE?

Customer lifetime

Employer 1

EBC1 EBC2

Employer 2

Vesting

IFA/adviser

IFA/adviser

IFA/adviser

IFA/adviser

IFA/adviser

IFA/adviser


Life insurers: what role to play?Large opportunities and substantial threats

Administrator TraditionalLarge

corporate DC

Wrap/aggregation

Packager Manager of Managers WorksiteWrap/aggregation

Distributor Own advice proposition WorksiteWholesaler

Investment deal (what is distinctive?)

Cash EquitiesCapital intensive

Guarantees/smoothingAnnuities

Corporate bonds &

mortgages

Protection provider Term AnnuitiesMedical

expensesDisability Critical illness


“Product push”, “jam today”, lower business

quality; a pressured business

Aligned to segments needs, large case sizes, relationship based, asset based

Don’t need or can’t get advice; thin margins and modest volumes

A new three way polarisation?


“Advice/product proposition”

Direct offer(Ex

only)IFA

Narrow panel

Best ofBreed

Basic advice(Sandler

products)Multiple

products & providers

IFAWhole market

Full advice

Direct sales

Provider relationship

Singletie

Whole-saler

Multiple ties

Single or multiple ties Multiple ties Whole-

salerSingle tie + gap fill

Customer segments(simplified)

Self-directed Middle income HNWMiddle

incomeMass

affluent


Summary:a future, but a different one

■ Traditional face-to-face distribution of current product sets with current advice propositions will remain under pressure for all but the best relationship builders

■ The Basic Advice Sandler regime will not make much headway■ Banks will not make it a priority■ Worksite for employees remains a possibility

■ Related developments in Pensions and worksite will create substantial new business opportunities for distributors; but:■ The standard, scope and frequency of advice will need to increase

significantly to justify economic distributor incomes■ Charges on top of commodity levels will be possible if this is

achieved■ Advice propositions will need to be carefully developed for diverse

segment needs -- including asset allocation■ Worksite will develop opportunities for executives with full advice

and for employees via low cost variations■ Life companies will be challenged in developing their propositions

as manufacturers

asc-pre-can traditional face-to-face selling survive ... · life insurers have less flexibility...

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