The UK with-profits life insurance industry: a market

Report by Centre for Risk and Insurance Studies, Nottingham University , Business School

The life insurance industry has a major presence in the UK economy. In 2007 it received £185 billion premiums and paid £170 billion in claims (ABI, 2008). It is a major investor, with assets totalling £1478 billion (ABI, 2008). Its importance is also shown through international comparisons: it is the second largest life insurance industry in the world, measured by premiums; and, measured by premiumsper head, it is the largest in the world (Swiss Re, 2008).

It is therefore important to understand the structure of this market and how it operates. This report focuses on the with-profits sector of the market. With-profits business has traditionally been the mainstay of the UK life insurance market, but recent years have brought significant challenges. The financial position of many with-profits life insurers worsened following the decline in long-term interest rates and the fall in equitymarkets in 2000-03.

Many firms have closed to new business, and the market has seen substantial consolidation, with several changes of ownership. New with-profits business has declined significantly.


An industrial economics perspective of markets has traditionally emphasized the degree of concentration in the market. However, high concentration may reflect either a lack of competition or the outcome of competition, as successful firms increase their market share.If the latter applies, high concentration may still need monitoring to ensure that there is no market power leading to abuse and consumer detriment.

Nevertheless, to understand the with-profits market, we do need to understand the market structure and the extent to which the market is concentrated.

The information incorporates both standard and mechanical branch business, the last truly being low-premium business where a disaster protection organization salesperson gathers the premiums from the family unit. Practically speaking, almost no modern business is presently sold. Industry focus is normally measured with reference to yield (or limit), yet the inquiry of what constitutes yield in the disaster protection industry and how to gauge it has been questionable.

Various creators have utilized cases (counting the expansion in a company’s liabilities) as a measure of an association’s yield (e.g. Cummins and Zi, 1998). In any case, this has been scrutinized: a firm won’t wish to have a higher as opposed to a lower measure of cases (Diacon et al, 2001). One methodology, utilized as a part of the UK national records, is to say that an association’s yield is the aggregate of the premiums it has gotten in addition to the venture return it has earned short the cases it has paid (counting the expansion in its liabilities): this speaks to what policyholders are paying for the administrations the back up plan is giving, being the sum they are swearing off from what they would some way or another have gotten (O’Brien, 1991).

Be that as it may, the nature of extra security bookkeeping information implies that it is hard to build a reasonable measure of fixation in light of yield measured along these lines. We along these lines measure focus with reference to other business sector markers: resources, liabilities, premium sand new business. Resources is a measure that is obviously pertinent to grouping of force in speculation markets, in spite of the fact that with-benefits life back up plans are not, obviously, the main financial specialists.

Focus by measure of liabilities is all the more specifically pertinent to the potential impacts of fixation on clients, in spite of the fact that it reflects to a great extent the development of liabilities throughout the years. The premium measure combines the impact of new and existing business. In any case, most vital for rivalry and the potential effect on customers is convergence of offers, consequently we respect new business of specific significance. We now consider what we mean by “firm”.

In spite of the fact that information is accessible for each approved back up plan, there are numerous situations where two or more safety net providers have a place with the same “gathering”, i.e. offer the same extreme holding organization. The organizations in a gathering commonly have the same administration, and it is sensible to assume that they are overseen together. Our unit of investigation is hence at gathering level.

The European Commission’s Directorate-General for Competition (2007) uses the HHI as a measure of the level of concentration, describing a market as un-concentrated if the index is less than 1000; moderately concentrated if between 1000 and 1800;and highly concentrated if above 1800.

Most with-profits life insurers were established many years ago, many dating back to the 18th or 19th century. Only one firm writing with-profits business has been established since 1995: Pension Annuity Friendly Society. This was founded with capital provided by a bank and a re insurer, so it differs from the traditional with-profits firm, where the capital is thought of as having been largely provided by policyholders. The society demutualised, transferring its business to a proprietary life insurer, Partnership Life, in 2005. However, given the decline in with-profits business sales, the fact that there has been only one recent entrant is not surprising.

A difficulty for new entrants is to establish distribution outlets, which is one reason why U.K. life market new entrants have had only modest levels of sales (O’Brien, 2001). If a firm is to rely on its own sales force, it will take time (and capital) to build this up, while it is difficult for a new insurer to establish a reputation that will result in high levels of sales from independent financial advisers. The alternative of ‘direct’ channels such as using the internet has not been easy.