The UK life insurance market 2022

Introduction

Matthew Edwards, UKI Life Proposition & Innovation Lead, Insurance Consulting and Technology

Making any predictions for the year ahead is always risky. One thing we have all grown used to over the last two years is the sense that ‘anything could happen’, and that remains the case. But this year it's reasonable to think that such an 'anything' will be something insurers can tackle with confidence. One lesson from the pandemic has been that agile insurers with robust, well-automated systems and the appropriate capital can withstand some incredible shocks. These insurers are also likely to profit most from the recovery we are now seeing, with the UK economy rebounding strongly, and insurers looking to capitalise on this growth.

So what will 2022 look like? The term ‘new normal’ was thrown about a lot in 2020 as we started to wonder what life would be like ‘on the other side’. That binary idea of there even being a well demarcated ‘side’ is clearly simplistic, and we find ourselves instead wondering where we will be on a spectrum of normality. Every individual, and also every insurer, has to work out for themselves what they want their ‘new normal’ to be, and how it’s going to work.

We have also been thinking about this question. Our core focus, being the best we can for our clients, has helped us to formulate our own ‘new normal’ for 2022, and a key part of that is rethinking how we best support our clients. To better reflect how many of our clients work in particular areas, with similar issues, we are implementing a ‘segmented’ approach to our strategy.

These segments are: Accumulation & Savings, Retirement & Decumulation, Legacy, and Protection business. We have very talented experts leading these segments, and they set out below their views on the many challenges and opportunities 2022 holds in store across these four segments.

As you can see, it’s going to be an interesting year. We hope your ‘new normal’ is better than the recent not-so-normal!

Daring to differentiate in the accumulation & savings market

Phil Tervit, Accumulation & Savings Segment Lead, Insurance Consulting and Technology

Now, with almost all defined benefit schemes closed to new members, and auto-enrolment in its tenth year, we are really starting to see defined contribution (‘DC’) as the central pension savings route for new pensions money. Couple this with individual savings through ISAs, Lifetime ISAs, Junior ISAs and General Investment Accounts (GIAs) and the Accumulation & Savings market is both vast and growing steeply.

Market participants are investing in a number of areas to stay ahead of the crowd – key differentiators include customer-interfacing technology, price and the investment offering (increasingly with ESG options, and we comment further on climate aspects below). Behind the scenes, firms are seeking to manage costs through third-party outsourcing solutions and automation. All this whilst delivering great service to customers, and coming to terms with the Consumer Duty regulations from the FCA. The stronger players will be very active working on these propositional differentiators in 2022.

We expect 2022 to be the year that Master Trusts declare victory as the ‘go to’ vehicle for employer defined contribution schemes, following on from the Pension Regulator’s (tPR) authorisation of Master Trusts in 2019. There are currently 38 multi-employer Master Trusts, and we expect contraction in this number over the next five or so years.

It is worth noting that this market straddles a variety of players including traditional insurance providers, investment firms, asset managers, specialised fintech third party players and advice firms. Chief Finance Officers and Chief Risk Officers of these firms may be operating under PRA Solvency II and FCA prudential regulation for these product lines, and often both within the same Group. This can be complex enough to navigate, but for those also needing to add IFRS17 into the mix, life becomes even harder. Explanation of business performance will take expertise and deft words to communicate well with Boards, shareholders and analysts in 2022.

Finally, on 1 January 2022, the new UK Investment Firm Prudential Regime ("IFPR") came into force for all UK MiFID Investment Firms. We are seeing some firms use the transition from their ‘Internal Capital Adequacy Assessment Process (“ICAAP”) to an Internal Capital and Risk Assessment (“ICARA”)’ as an opportunity to freshen up their assessment.

Increasingly, climate change is an important feature of regulation for these products and firms, as well as potentially being a differentiating feature for retail savings products. The entry of climate change into the thinking of sellers of accumulation products requires some retooling of investment techniques including asset allocation and risk management – yet another area for change this year.

These hot topics in the accumulation & savings segment for 2022 already provide ample challenges, opportunities and probably a few headaches but, as if all of that were not enough, the whole segment itself is encroaching more and more into traditional ‘retirement’ areas. More and more retirees are now opting to ‘stay invested’, favouring drawdown over conventional annuitisation: yet another reason to keep moving forward in this vast market.

The retirement challenge

Waheeda Narker, Retirement & Decumulation Segment Lead, Insurance Consulting and Technology

2022 promises to be a year of high volumes in the Bulk Purchase Annuity (“BPA”) market, with high demand from both sides: the pension scheme trustees and sponsors keen to transfer risk, and the insurers and reinsurers equally keen to take on this risk. We see a combination of ‘familiar’ factors at play here, such as a desire to reduce volatility in corporate balance sheets, with newer factors such as the higher inflation outlook and the ensuing worries for inflation-linked pension liabilities. Capital from across the globe is increasingly available, from regions including Asia Pacific, the U.S. and Bermuda, and the range of interested players is also expanding – from traditional players to private equity firms.

Towards the end of 2021, we saw the Pensions Regulator’s approval of Clara Pensions, one of two entities seeking to play in the new superfund landscape. These superfunds offer a new derisking route, targeting the less well-funded schemes that do not have the now ‘traditional’ BPA route available to them. 2022 therefore becomes something of a test year for this proposition, providing a further stimulus for pension derisking transactions.

For the retail side of the retirement market, volumes will depend to a large extent on how much insurers can come up with attractive products. We are seeing some resurgence in enhanced annuities, partly driven by renewed consumer focus on protection in the light of the pandemic and the general awareness of a secured income in retirement. There are also signs of product innovation with regard to different types of annuity, for instance later-life annuities and hybrid products.

As Phil Tervit noted above, there is increasing blurring between the accumulation and decumulation phases: middle-income customers are increasingly looking to manage their retirement wealth, driving demand for platforms offering accumulation and decumulation products. From a conduct perspective, there is an opportunity to improve advice (as well as product awareness and education) all the way through working ages into retirement and later life when supervised care is required. The FCA’s new Consumer Duty will intensify attention here.

While the above points sketch the main market themes for the year, there are a range of other factors at play. We will start to see the pandemic’s impact on workforce retirement patterns, perhaps with more early retirement due to a reinvigorated focus on work-life balance and the increasing automation in some industries; likewise a ‘less work, more life’ balance could lead to lower contributions to retirement savings. These factors will have an impact on the timing of retirement income needs and the structure of retirement income, providing a further incentive for product innovation or flexibility – including in insurers’ investment strategies in respect of policyholders close to retirement.

We look forward to providing more detailed views and analysis later in the year on how these trends are evolving.

A sigh of relief in the protection market?

Alastair Black, Protection Segment Lead, Insurance Consulting and Technology

Will 2022 be the year protection writers breathe a sigh of relief? Whilst we all hope that this year the word ‘pandemic’ will give way to the less threatening word ‘endemic’, the effects of coronavirus still hang over the protection industry.

The direct impact of the pandemic on insured lives’ mortality has been less than for the general population. However, pressure on the NHS and the resulting backlog, with many thousands of missed cancer diagnoses, will take a long time to clear. Similarly, mental health claims and the resulting pressure on mental health services have risen and that pressure will take time to unwind. The impact of Long COVID is yet to be fully understood in terms of magnitude, but the directional impact is clear: a deterioration of claims experience. A complex issue emerging is the use of vaccination status in underwriting. The ‘vaccine escaping’ variants have made the quantification of the vaccination benefit particularly uncertain, even before insurers think about boosters – let alone some of the ethical questions involved.

Insurers may see some opportunities emerging from the last two years. Might the ongoing difficulties accessing ‘real’ GPs lead to more demand for product add-ons such as virtual GPs or other wider engagement with health and wellbeing offerings?

Away from the pandemic, we expect 2022 to involve further progress on digitalisation and analytics, improving both back office efficiencies, as well as enhanced customer focus and understanding to improve product offerings and choice. This should help with customer engagement, and may be a solution to the ‘protection gap’.

The increased customer focus and understanding can also support further pricing agility and sophistication, a journey most protection writers are on. Insurers are at different stages of sophistication, but there is the potential for all to be doing more.

Finally, 2022 will see the publication of the FCA’s Consumer Duty policy statement. Whilst the protection industry already has strong processes around fairness, the FCA’s focus on fair value from the consumer perspective is likely to require more work. With the likelihood of increased responsibility on insurers for the end customer’s “fair value”, much of that work will revolve around changes to the management of particular distribution channels.

2022 may offer some breathing space after the last two years, but it is sure to be an interesting year for the protection market.

Legacy business – a problem, an opportunity, or both of those?

Trevor Fannin, Legacy Segment Lead, Insurance Consulting and Technology

Legacy life business is a term commonly used to refer to life products that are closed to new business. While this business may not be a core focus for many insurers anymore, it can still be a valuable source of income, something clearly appreciated by the consolidators. However, organic and inorganic growth in the past has left many insurers grappling with an array of different products and fragmented and outdated IT infrastructure. The resulting complexity can account for a large percentage of firms’ operating and IT costs and so managing legacy business is a key challenge for a lot of the industry. Some firms also recognise that they are missing an opportunity from poor customer engagement.

A further challenge is the impact of the FCA’s imminent Consumer Duty requirements for legacy business. How this will apply is still unclear, but it is likely that over 2022 firms will also need to assess their legacy business through a new Consumer Duty lens.

What else does 2022 have in store? In recent years we have seen a number of firms review their legacy business and explore emerging solutions, including product and fund simplification, automation and alternative reinsurance arrangements as well as the traditional solutions like outsourcing and Part VII transfers. This year could prove to be the ‘catch up’ year for other firms with lingering legacy issues to keep up with their peers.

There has also been significant investment-related activity with pooling of legacy investment funds, a wider universe of assets being considered, and a progression to lower investment fees. With aggregator investment platforms coming more to the market, investments costs may reduce even further while also allowing for greater investment choice. In our 2021 survey of with-profits funds, we noted that many firms are developing more sophisticated Strategic Asset Allocation models for their legacy business and these are likely to continue to develop over the next few years, including the integration of climate considerations.

There are substantial inter-dependences between many of the challenges in respect of legacy business and so in order to deliver successful solutions, our view is that ‘right-to-left’ thinking is needed to set the target operating model, define the change actions needed, and then set the sequencing.

Costs, uncertainty, complexity and bandwidth are key barriers to firms adopting many of these solutions. However, the most benefit will come from being ambitious when defining the scope of work. The potential benefits to both policyholders and the business can be transformational.

Some companies have already taken action and are reaping the benefits now. We are working with these firms as they continue their journey, and helping others to develop their plans and begin their journey. We expect the pace of change to increase in 2022 as companies realise the extent of what is possible and recognise that the earlier they take action, the greater the benefits will be.