LONDON, February 8, 2022 — An increasing number of insurers are taking steps to rationalise their with-profits products and funds in order to simplify complex portfolios and address associated rising costs, according to a new industry study by WTW (Willis Towers Watson, NASDAQ: WTW), a leading global advisory, broking and solutions company.
“Depending on the level of ambition, many of these emerging solutions can be transformational.”
Trevor Fannin,
Senior Director and UK Legacy Segment Leader at WTW
In the 2021 WTW UK With-Profits Survey, covering £215bn of assets, spread over 36 with-profits funds from 13 insurers, a number of firms indicated that while established risk management solutions remain embedded across the industry and continue to be implemented by a large number of funds, these often fall short of fully addressing more complex issues affecting their with-profits business. Expenses, operational risk and policyholder engagement continue to be significant challenges from a company perspective.
The survey highlighted that while the challenges are increasing, so are the opportunities, and WTW are seeing companies at different stages of making the most of these opportunities. These include embracing more sophisticated strategic asset allocation (SAA), product simplification and fund mergers.
Trevor Fannin, Senior Director and UK Legacy Segment Leader at WTW, said: “We are seeing a lot more market activity around emerging risk management solutions to address these challenges, including product simplification and conversion. While some solutions involve high cost or other barriers, the potential benefits to both companies and policyholders are significant. Depending on the level of ambition, many of these emerging solutions can be transformational.”
The survey also revealed that firms experience significantly different returns, even where their asset allocations are similar at a high level. The key factors explaining this are firms’ differing approaches to SAA and risk control.
Gareth Sutcliffe, Head of the Insurance Investment Solutions Group, WTW, said: “Regulators continue to encourage insurers to assess SAA independently, and market pressures mean firms need to consider, analyse, and optimise investment portfolios. As part of this, a number of insurers are developing more sophisticated SAA models, however some are falling short and may be exposed to regulatory scrutiny as a result.”
Investment management expenses have reduced significantly over recent years and, with aggregator investment platforms coming to the market, costs may reduce further while also allowing for greater investment choice.
The survey findings also reveal that most with-profits funds appear to be in the early stages of developing a strategic response to climate change and risk lagging behind the progress being made by unit-linked and annuity providers as regulatory momentum accelerates. WTW expects that many firms will need to significantly increase their work in this area and that With-Profits Actuaries and With-Profits Committees should be pushing hard for change.
Trevor Fannin said: ”Opportunities for the with-profits industry to address these challenges are increasing. Some companies have already taken action and are now reaping the benefits. 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 return.”
The survey considers a broad range of issues relevant to the management of UK with-profits funds. The survey continues to be one of the most comprehensive in the industry, based on responses covering 36 with-profits funds, including the majority of the medium to large with-profits companies in the UK.
Responses were grouped into three main categories:
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