The U.K. life insurance market is the largest in Europe and the third largest in the world, but life insurance sales have been stagnant over the last decade.
This article is expected to be of interest to actuaries and students who either already operate in or would like deeper insight into life insurance/protection product markets. I hope you will be able to draw some comparisons with your home market and perhaps apply some learning points. I would be interested to receive any observations from a U.S. market perspective.
THE MAIN PRODUCTS
Level term insurance is a staple product in the U.K. market, providing cover for a specified duration, usually up to
a maximum age of 85. Customer premiums are constant over the duration of the policy. Decreasing term insurance is often used to cover repayment mortgages. The reducing outstanding mortgage is estimated by making an assumption of the average long-term interest rate. Life cover decreases in line with this schedule.
CRITICAL ILLNESS INSURANCE:
Critical illness insurance emerged in the 1980s, initially paying a lump-sum benefit on diagnosis of a few specified “dread diseases.”
It is usually linked to life insurance so the customer also receives the benefit on death. For early products, customer premiums were regularly reviewed, for example, every five years. The process for calculating such reviews and the corresponding negotiations with reinsurers was complicated; the U.K. regulator would issue TCF (treating customers
fairly) guidelines for how reviews should be calculated. As reinsurers became more confident at pricing the risk, guaranteed products became more popular. Initially, these were significantly more expensive than reviewable policies, but there is now little difference, perhaps reflecting the risk of pressure to reduce reviewable rates in
the light of favorable experience.
Income Protection is a type of product that enables customers to protect their income, should they become unable to work because of incapacity or illness. Unemployment is sometimes also covered. Most policies are now sold on an own occupation basis. Recent sales have been poor, with only 120,000 policies sold in 2012, just over half
the level of 2003. Limited payment policies are starting to appear on the market, most paying claims for five years with some one- and two-year products as well.
Historically, the market has been dominated by large established life insurers. Product differentiation has been limited, and providers have tried to gain advantage through scale, although this has proved difficult in a stagnant market. Smaller providers and niche operators are now increasing their influence and bringing product differentiation to the market.
Reinsurers have had a significant influence for some time. Competition for business has been ferocious, with reinsurers cutting rates, which reflects mortality improvements and the prospect of such improvements
continuing. Life insurers have found it profitable against their more cautious internal assumptions to cede an increasing share of the risk, often as much as 100 percent. This has ceded control of the risk
market, including its pricing, to reinsurers.
Reinsurers’ domination of the market price of risk has, however, become a double-edged sword. The increased cessions drew increased focus on reinsurance terms and more frequent rebroking by insurers, which
the intensely competitive reinsurance market has accommodated. As reinsurers’ margins have been squeezed, the market has become more commoditized and price driven, to the detriment of product innovation.
The U.K. market is heavily regulated, and market change has often been driven by changes in regulation or taxation. Regulation has traditionally served as a barrier to new entrants and has constrained the market from within. Post-RDR, the advice sector has contracted, suggesting that the biggest opportunities might arise from Direct
to Customer or redeveloping the advice system. Online audit trails could enable effective regulation of such sales processes and provide some much-needed confidence to regulators and developers of new sales processes. There is potential for applying learning points from innovation in the investment sector of the American market to the U.K. market.
Commercial, consumer and regulatory environments are combining to form a fertile breeding ground for much-needed innovation to be brought to the U.K. market. I am optimistic that the market will move forward, through a combination of ambition and trust between all stakeholders.
UK Life insurance and Life insurance companies and landlord insurance details are available.