LONDON (Reuters) - Consumers shifting their money between life and pensions products may mean higher sales for insurers, but this year unpredictable Britons will also mean one-off charges and, for some, a dent on profits.
Two insurers who reported 2007 sales last week — Friends Provident FP.L and Standard Life SL.L — have already said they will take charges for an increase in surrenders.
That comes on top of provisions taken last year after an unusual 2006, when UK rule changes prompted many to alter financial arrangements.
In Friends’ case, a 160 million pound 2007 provision accounts for almost half of a string of charges that will all but wipe out the year’s profit.
Standard Life will not detail the size of its write-down until full results are published in March.
Lapsing customers — often prompted by a UK system which still rests on financial advisers paid by commission — may not be as serious for more diversified insurers. Giant Aviva (AV.L), for example, is less dependent on intermediaries and on pensions, and can channel customers into other products.
But analysts say worries over the assumptions underlying insurers’ profits will affect the whole sector, both during full-year results over the coming weeks and into 2008, with a weakening economy set to tempt even more consumers to stop paying into policies and pensions when the belt tightens.
“You can expect to see negatives coming through, but I think you’ll need to be eagled-eyed to pick them up,” analyst Kevin Ryan at ING said, adding companies could report the adjustments simply as “economic” assumption or other changes.
“These issues are exacerbated when investment markets are not performing. If you can realise capital gains and have a good time, you can paper over a lot of cracks,” he said. “When economies slow, if you have a pension you are not going to put more money into it. You may stop putting money in altogether.”
The length of time consumers hold on to an insurance product — known as “persistency” — is not a new subject of debate for the industry, which has increasingly struggled to retain customers at least long enough to offset initial investment.
Figures published by the Financial Services Authority last year show that after four years, only roughly 40 percent of policies are left unmoved, though it can take a decade for insurers to make money from these products.
Correctly estimating loyalty is critical for life insurers as assumptions on policyholder behaviour underpin how insurers report profit. Embedded value accounting standards, widely used by the European industry, are based on the present value of future profit — and that depends on consumer behaviour.
If customers drop out early, insurers have to alter their estimates of how much profit they make from each product.
The debate over persistency has also fuelled criticism that much of what is reported by the sector as “new business” is just recycled.
“Friends have put the spotlight on this, but it’s an open secret. People have been worried about it for some time,” analyst Raghu Hariharan at Fox-Pitt, Kelton said.