An industry in a state despite the state in the industry
Irish Broker – May 2012
Is our industry really in a state? Over the last 12 months this column has called for change in the life assurance industry, has attempted to stimulate meaningful dialogue and has proposed a series of alternatives to the existing industry model. Yet the silence from industry stakeholders has been deafening. This is despite the consensus view that the industry model as it stands now is broken and is in dire need of review and probably overhaul.
So what is and, more importantly, what is not happening? Why is there such inertia in an industry in which we all, and indeed the country as a whole, has such a stake?
We are all seeing the symptoms of poor household financial management. The recent Quarterly National Household Survey showed that almost 80% of households cut back their spending as a result of the economic climate. Loan repayments and credit card bills are being missed and savings dwindling as they are used to pay household bills. High levels of personal indebtedness are combining with uncertain job security to produce a toxic mix. From a social policy perspective the importance of protection and pension products has never been greater.
Over the last three years we have seen the State make a series of moves to stabilise the banking sector which now make it the predominant stakeholder and player in the life assurance industry. Alongside this has come the Central Bank’s moves to impose stronger governance practices and fitness and probity requirements in an attempt to build greater transparency and restore public and international confidence in the Irish financial sector. The restructuring and recapitalisation program now sees the tax payer represented on the boards of the banks in the form of public interest directors.
However, these entirely necessary and laudable steps have not been matched by a willingness to learn from the experiences of other jurisdictions and build an equally transparent and sustainable business model for the life assurance industry: a model which has honesty and integrity at its core and which Irish consumers are happy to engage with once again. A model in which we will possibly see public interest directors on the boards of the State-owned life assurance companies. Meaningful change, however, will not come about unless the State, as the now dominant player in the life assurance industry, takes an active role in promoting change.
We all know that the status quo is completely unsustainable. We all know that the ridiculous pricing gimmicks and short term irrational pricing behaviour are merely vain attempts to build market share. We all know they ultimately work to undermine consumer confidence and may in fact come back to haunt the consumer. But where, when and how will it end?
In the UK in 2005, the market dynamic was such that the regulator felt compelled to step in and address the issues so that the long term viability and integrity of the industry would remain intact. Life assurance companies were dipping into their reserves to pay unsustainable commission on Group Pension products. This pattern of behaviour was undermining the structure of the business model, making it potentially unstable and unsustainable. Analysis showed a chronically poor level of persistency and a worryingly negative trend. This led to real action on the part of regulatory authorities with the Financial Services Authority summoning all stakeholders to enter dialogue and open discussion. The objective was to produce recommendations for the creation of an industry model that had integrity and that all participants would willingly engage in.
The following five years saw meaningful industry dialogue in the form of the Retail Distribution Review (RDR) with many of its recommendations finally becoming law in 2012. Ultimately, what it has led to is the December 2013 deadline by which financial advisers must make the switch from commission-based advice to fee-based advice. It looks as if Denmark and The Netherlands will, in time, move to the same model.
While the RDR has in no way proved to be the perfect solution to everything, it at least achieved the recognition by the stakeholders, supported by the regulator, that something needed to be done.
The parallels for Ireland are blindingly obvious. Here the life assurance industry is at the same crossroads that the UK industry was at in 2005. The old order is no longer working. Unsustainable business practices are rife. There is a dire need for change before it’s too late. But who will grasp the nettle if the life assurance industry and in particular, the State as the largest player, won’t?
