Beyond 2020: The future of Life, Pensions and Health

Forces shaping the industry

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Given the extent of the changes happening all over the world, it’s possible to spend a considerable amount of time exploring the many factors that could impact the future of the UK Life, Pensions and Health Insurance industry. This prioritised summary of the forces shows which factors will have the greatest impact in shaping the future. As always, it’s necessary to consider these issues in the context of an enterprise’s individual circumstances.

1. The industry’s core target market changes fundamentally as the wealthy get older and Generation 2020 are prevented from saving until later in life.

Significant student debt and high mortgage barriers force Generation 2020 to acquire mortgages or save later in life. The under 40s are mostly economically prevented from taking control of their finances and therefore the industry’s core target market becomes those aged 40-80. In the 1960s the average age for first time mortgages was 26.



Average age of a first-time home buyer in the UK


EY - Beyond 2020 : Forces


"We are entering a phase where retirement by 65 is a luxury restricted to the wealthy and the well prepared. We will see a recurrence of the pre-second world war scenario where people accept they will have to do at least part time work into their old age. What we briefly had …will fade into a distant memory."
Toby Strauss, Group Director for Insurance, Lloyds Banking Group



  • Student debt could be as high as £67,000 for a full-time student in London – GOV.UK (2013).
  • The ratio of average house price to average salary has risen from 2.7 to 4.4 over the last 30 years – Nationwide (2012).
  • The proportion of low and middle income earners aged under 35 and renting has more than tripled to 47% since the late 1980s – Resolution Foundation (24 January, 2012).
  • The average person in their 20s today will need to save for 30 years in order to obtain an house deposit if they live in London or 14 years if they do not – Shelter (2013).
  • The main conclusions of a new survey by Countrywide showed that of those renting, over half – 56% – of tenants cited deposit affordability as a barrier to getting on to the property ladder – The Telegraph (April 16, 2012).

2. An attractive mass savings market no longer exists as pockets of wealth are increasingly ethnically diverse or at different stages of retirement.

Investment money is available but is held in fragmented groups. Many of these groups are near / post retirement or are comprised of entrepreneurial and professional migrants with widely differing cultural experiences.



Income by ethnic group (men, 2006-08)



EY - Beyond 2020 : Forces


Wealth by UK region (household wealth of individuals, age 45-64)



EY - Beyond 2020 : Forces


  • The average 45-64 year old has over twice the personal wealth of the average 18-44 year old – HMRC, UK Personal Wealth Statistics 2008-2010 (2012).
  • There are over 700,000 Indian-born individuals living in the UK, and this group earn more than the UK average - Office for National Statistics (ONS) (2012).
  • The number of wealthy foreign entrepreneurs heading to the UK to start new businesses has more than doubled in a year – analysis of entrepreneur visas granted, Pinsent Masons (2013).
  • Chinese and Indian ethnic groups have better A-level results at age 19 compared with other ethnic groups studying in England: 83% of Chinese and 78% of Indians have two or more A-levels or equivalent qualifications versus 54% of the white British population – Department for Education (27 March 2013).



"It will be important for insurers to reach these pockets of wealth, but Insurers don’t adequately provide for ethnically diverse groups at the moment as the industry does not properly understand them."
Toby Strauss, Group Director for Insurance, Lloyds Banking Group



"The ever increasing number of older, part-time and flexible workers will change demand for certain policies and could alter the life cycle of pensions products."
Peter O’Donnell, CEO, UNUM UK

3. Low and middle income consumers will only save through government pensions initiatives.

Auto-enrolment will be a partial success. Beyond 2020, employer schemes will soak up the majority of low and middle income savings, which will inhibit growth in the savings market beyond auto-enrolment. Auto-enrolment in the short term will lead to a false sense of security and, ultimately, contributions will have to go up. The government has done too little in the past to “force” individuals to save sufficient amounts and so a substantial savings gap will remain, particularly for those closer to retirement.



Pension savings in the UK – before auto-enrolment (2011) and projected effect by 2020


EY - Beyond 2020 : Forces


"Workplace saving will become increasingly important but will be challenging given the market for auto-enrolment and average salaries of people moving into the schemes. Also, how will advice be facilitated in the workplace?"
Anonymous



  • Auto enrolment is expected to increase the annual value of pension savings by around £15bn in steady state – Department for Work and Pensions (2009).
  • Minimum contribution rates for auto-enrolment will increase from 4% initially to 8% in 2018; Australia is planning to increase the employer contribution rate from 9% to 12% by 2019 - Australian Tax Office (2013).
  • The median average income is expected to be no higher in real terms in 2016 than it was in 2003 – Institute for Fiscal Studies (2011).


"Auto-enrolment will give providers the opportunity to engage directly with employees in the workplace."
David Barral, CEO, Aviva UK and Ireland Life



“Our present challenge with big data is gathering and deploying useful insight from it, this will shift to needing to gain more data and then using it to interact intuitively with our customers.”
Mike Kellard, CEO, Axa Wealth

4. Savings market growth is inhibited by the Government’s inability to reduce the deficit and therefore use tax relief as a savings incentive.

While the Government continually tries to find the financial “elbow room” to stimulate economic growth, this will not occur. The ageing population further increases the deficit.



Reduction of pension tax incentives


EY - Beyond 2020 : Forces


Public sector net debt as a % of GDP, 1975/76 to 2012/13


EY - Beyond 2020 : Forces


  • UK Government debt will reach 100% of GDP by 2015 – EU Economic Forecast, European Commission (2013).
  • Net government borrowing is forecast to remain above the EU guideline rate of 3% until at least 2016 – Office for Budget Responsibility (2013).
  • On 7 January 2013, HMRC will remove child benefit from households where one individual earns more than £60,000 – The Spending Review (2010).
  • “In order to address the fiscal deficit, the Government believes that it is right to ask those on higher incomes to contribute more” - HMRC (2013).
  • Britain’s total net public debt, excluding the direct costs of bailing out the country's banks, is still much higher than before the financial crisis at some £1.2tn or 74.9% of GDP – The Telegraph (19 July, 2013).

5. Only companies with substantial existing UK life operations will invest here.

Global life companies are focused towards countries with higher growth and less onerous conduct of business regulations, such as BRICS and similar economies. The UK cannot currently match the competitive shareholder returns available in fast-growing economies and, by 2020, this trend will be even more marked.



Return on inward and outward investment from the UK


EY - Beyond 2020 : Forces


“With interest rates expected to remain low, people will really struggle in retirement – how do you get any yield greater than inflation?”
David Barral, CEO, Aviva UK and Ireland Life


“Higher yields outside the UK will continue to attract investment funds, despite the risk of a regulatory ‘train wreck’.”Anonymous

“Asia is still growing rapidly, but so is the risk of regulatory fall-out.”Anonymous



  • The share of global GDP controlled by China and India will increase from 22% today to 39% by 2030. At the same time, the share controlled by the G7 will fall from 47% to 33% - OECD (2010).
  • 88 per cent of UK senior executives feel that regulatory change is preventing their organisation from addressing other urgent business priorities and as a result the UK financial services industry is losing its competitive edge – Moorhouse (2012).
  • Price-to-book ratio of Asian life companies are two to four times those of comparable UK firms – Reuters (2013).
  • The Prudential is considering moving its headquarters out of the UK to escape tougher new capital rules for insurers – BBC (2012).
  • “You won’t hear from us a ‘be afraid’ tone. That is not how we want to act. It’s not just enforcement-led. We’ve got to use the full range of tools.” FCA Chief Executive Martin Wheatley talking about UK Financial Services Regulation – Financial Times (March 21, 2013)

6. Firms are enabled or swamped by “big data”.

Availability of data about consumers’ health and behaviour will continually increase, as will some firm’s understanding of it. Competition breaks out between companies looking to make the best use of big data.



Cost of sequencing the human genome


EY - Beyond 2020 : Forces


“Insurers need to use their customer insight to retain more risk, more profitably.”
Toby Strauss, Group Director for Insurance, Lloyds Banking Group

“Firms have got to get to grips with using data otherwise they will simply fall behind.”
Peter O’Donnell, CEO, UNUM UK

“Life companies have been shockingly bad at using customer data effectively .”
Phil Loney, Group Chief Executive, Royal London Group



  • Discounts on Tesco insurance products can be as high as 18% when Clubcard details are given – Loyalty cards and insurance: every little helps, The Economist, (2011).
  • Around 80 per cent of deaths from major diseases, such as cancer, are attributable to lifestyle risk factors such as smoking, excess alcohol and poor diet – NHS England (11 July, 2013).
  • Companies that have already implemented advanced analytics have shown that profits and productivity can be increased by 5%-6% compared to the competition - Making Advanced Analytics Work for You – Harvard Business Review (2012).
  • Only 0.5% of commercial data is analysed currently – IDC Digital Universe (2011).


“Big data is hard to use and this is why it is not used everywhere - implications such as who owns it are all complex issues.”
Anonymous

7. The Government creates a “new deal” following pressure to “solve” youth unemployment. This creates incentives and causes changes in the employment and training picture.

The economy will remain weak beyond 2020. Pressure from new graduates increases - saddled with debts and with opportunities not growing in line with aspirations – they exert significant political pressure. The Government incentivises keeping jobs in the UK and consumers focus on firms’ moral and social responsibilities.



Youth unemployment in the UK


EY - Beyond 2020 : Forces


  • Youth unemployment has a lasting impact on the wages of the entire cohort - wages are 23% lower for those who suffered youth unemployment after 10 years – Left behind, The Economist (2011).
  • 19% of firms plan to move manufacturing locations from low to higher cost locations in the 2012-14 period - this marks a distinct increase from 2009 to11 where only 9% of companies were planning such a move – McKinsey survey for the Economist (2012).
  • UK GDP growth is forecast to average just 3.2% per year between 2013 and 2017 – Oxford Economics (2012).
  • “Youth unemployment is Europe’s most pressing problem.” Angela Merkel.

8. Even if the UK leaves the EU, the regulatory burden remains high and in line with other EU countries. The UK may well move to a Swiss or Norwegian –like position within the EU.

Leaving the EU will have a considerable impact on other markets, however, it does not greatly affect Life, Pensions and Health. The UK still has to comply with EU and Global legislation. The costs of compliance continue to be high and complexity is forced upon the industry.



Comparison of UK membership of EFTA and EEA versus EU


EY - Beyond 2020 : Forces


  • Fewer that 50% of the UK public would vote to stay in the EU – YOUGOV (2013).
  • The British Government estimates that around 50% of UK legislation with a significant economic impact originates from EU legislation (2010).
  • “While leaving would not be in our country’s best interests…the British people are not happy with what they have, and neither am I. That’s why I said on Friday that the problem with an in/out referendum is that it offers a single choice, whereas what I want — and what I believe the vast majority of the British people want — is to make changes to our relationship.” David Cameron writing in The Telegraph in an article entitled, we need to be clear about the best way of getting what is best for Britain (30 June, 2012).

9. The overall reputation of retail financial services proves irrecoverable. While hostile towards banks, consumers are indifferent towards insurers. But a few emerge with better than average brand values and benefit significantly from this.

A continual stream of PPI-like scandals, regulatory reviews and poorly managed consumer expectations around sales will sustain low trust in large, traditional financial services providers. Certain specialist players will stand out as exceptions if they are actually prepared to live their brand values and increase transparency, particularly around fees and benefits.



Complaints made to Financial Ombudsman Service


EY - Beyond 2020 : Forces


“The reputation of the financial services industry has been so greatly damaged that it won’t recover. The public are very sceptical but trust has been irrecoverably lost.”
Phil Loney, Group Chief Executive, Royal London Group



  • The volume of FSA fines to financial services institutions has risen tenfold since 2002 – FCA (2012).
  • The proportion of people who say that they trust banks to do the right thing is just 28% almost half of the 2007 peak - Edelman Trust Barometer(2012).
  • Almost half of the 2.6 million interest only mortgages due to mature before 2040 could experience a shortfall of tens of thousands of pounds - FCA (2013).


“Most people do not trust financial services companies to do what is in their customers' best interests.”
Rodney Cook, Chief Executive, Just Retirement

10. The Government eventually shifts the rules and incentivises unlocking of housing equity.

As the Dilnot (or Dilnot-like) world approaches, residual wealth will still need to be accessed. The quality of state national care will not be acceptable to many people, regardless of whether it’s at home or in a residential institution. Despite the current rules on equity release being cumbersome and difficult to navigate the product is growing, albeit from a narrow base. The interests of customers, government, pressure groups and financial services institutions will align and cause the whole rule book to be rewritten.



UK income and house price growth


EY - Beyond 2020 : Forces


“To make equity release sustainable we either need to see some product innovation to shorten the duration of loan or the government needs to remove the tail risk.”
Mike Kellard, CEO, Axa Wealth

“A house is the last thing people want to give up – ‘my home is my castle’ still stands. Increasingly they won’t have any choice.”
David Barral, CEO, Aviva UK and Ireland Life

"People in later life need help to stay in their own homes if long term care costs are to be contained."
Rodney Cook, Chief Executive, Just Retirement



  • Since 1981, the number of centenarians in the UK has increased from 2,600 to 14,600 in 2012, and is projected to exceed 300,000 by 2050 –Office for National Statistics (2012, What are the Chances of Living to 100?).
  • The Committee on Public Service and Demographic Change called on the Government to act to change the perception of equity release products ensuring that equity was released simply and “without excessive charges or risk”. They argued that reducing risk and charges will improve confidence in the industry (2013).
  • "Forget the pension, go for equity release" – The Independent (4 August, 2013).
  • The median combined financial and property debt for a UK household is £78,000 – Office for National Statistics, The Burden of Property Debt in the UK (2013).
  • 21% of equity release taken in H1 2013 was to pay off outstanding debt on a property - UK Equity Release Market Monitor, Key Retirement Solutions (2013).
  • Housing equity owned by over 65s is in excess of £750bn; over the last 20 years, only £12bn (i.e., less than 2%) has been subject to equity release plans - Safe Home Income Plan (2013).
  • Equity release can be very expensive – for instance, a 65 year old taking a £87k loan on a £300k house would owe £343k after 20 years – The Guardian (2013).
  • 75% of people will incur costs of <£20k for long-term care but 10% will have costs of >£100k - Dilnot Report (2012).

11. Health or “near health” gets more personal expenditure (by the wealthier) as failures of the NHS become increasingly apparent.

Scandals, low NHS staff morale and the rapidly declining perception of quality in the NHS erodes trust. The principle of free at the point of use eventually fractures. Those who can afford to will take some private provision in order to improve their quality of care.



  • Private expenditure on healthcare increased from £10.8 bn in 1997 to £24.5 bn in 2011 (CAGR 6.0%) – ONS.
  • Public expenditure on healthcare was £44.0 bn in 1997 (80.4% of total health care expenditure) and rose to £118.3 bn (82.8%) in 2011 (CAGR 7.3%) – ONS.
  • Health is currently the second largest category of spending by the UK government totalling over £100bn in 2012 – ONS (2013).
  • Analysis shows that continuing with the current model of care will lead to a funding gap of around £30bn between 2013 and 2020 – NHS England (11 July, 2013).
  • The number of older people likely to require care is predicted to rise by over 60 per cent by 2030 – NHS England (11 July, 2013).


“So few people have insurance that covers illness at work compared with life insurance, but the chances of becoming ill and having to take a sustained period off work are much greater than your chances of dying during working age.”
Peter O’Donnell, CEO, UNUM UK



  • “Mid Staffordshire failed to tackle an insidious negative culture involving a tolerance of poor standards - Robert Francis, QC and Chairman of the Mid Staffordshire Public Inquiry, to Jeremy Hunt MP (5 February, 2013).
  • Jeremy Hunt last night said the "era of gagging NHS staff from raising their real worries about patient care should end” - The Independent (14 March, 2013).
  • “People were badly let down by the NHS and those responsible for healthcare regulation and supervision” - Care Quality Commission response to the Mid Staffordshire public inquiry (6 February, 2013).
  • The Government’s plans for deficit reduction have increasingly stark implications for public spending as their deadline draws nearer…the pace of reduction in total government spending is due to increase significantly in 2016 and 2017 – Resolution Foundation - Narrowed Horizons: The fiscal choices at Spending Review 2013 and beyond (20 June, 2013).

12. Only the affluent pay for advice. What remains of the mass market increasingly relies on social networks for recommendations and information.

As predicted, RDR improves the quality of advice but also makes it more exclusive and creates an advice gap. This dents the savings ratio even further. Those who have some money and want to participate contact a friend.



Number of advisors in the UK



EY - Beyond 2020 : Forces


"Social media has a role in insurance, but people are generally reluctant to share details of their financial situation, so it only works up to a certain point. For most people, a financial “health-check” every three to five years is really all they need”.
Paul Matthews, CEO UK and Europe, Standard Life



  • Lloyds has stopped offering advice to investors with under £100,000 to invest – Lloyds Banking Group (2012).
  • 48% of people use online comparison to research Life Insurance – EY & Ipsos Mori, Global Insurance Consumer Survey (2011).
  • A third of people looked at more than one site before purchasing insurance - Datamonitor, UK Insurance Aggregators (2011).


“The need [for customers] to talk to someone has not gone away – people still need this. They may do top-ups online but for pensions they’ll want to talk to someone. They may not want advice in the formal sense though.”
Toby Strauss, Group Director for Insurance, Lloyds Banking Group

13. Customers expect simpler and more responsive (electronic) sales and service experience.

Life assurers do not provide much access to in force data or easy net purchasing/planning. Internet shopping is having a massive effect and the UK is at the forefront. It is quickly becoming a minimal condition for business.



  • 27% of consumers in developed economies said that a high quality mobile phone banking presence was important – DataMonitor, Asia Pacific Digital Banking Trends in 2011 & Beyond (2011).
  • Following the introduction of “the First UK service to offer enhanced annuity rates live online”, Hargreaves Lansdown consumers enhanced their annuities by an average of 36%* in July – Hargreaves Lansdown web site (2013).
  • 11% of online consumers already interact with their bank or credit union through social media – Fiserv (2010).
  • 16% of consumers were influenced towards a certain policy or provider because of its simplicity and because the product was easy to understand, while a similar number were influenced by an easy application system - Mintel, Whole of Life Insurance (May 2012).


“Better technology solutions and an increased degree of compulsion will be needed to offset the impending advice gap”.
Peter O'Donnell, CEO, UNUM UK


“The customer experience needs to be "digitised" as much as possible, but some personal contact will still be vital”.
David Barral, CEO, Aviva UK and Ireland Life



Average age of a first-time home buyer in the UK


EY - Beyond 2020 : Forces×

Income by ethnic group(men, 2006-08)


EY - Beyond 2020 : Forces×

Wealth by UK region (household wealth of individuals, age 45-64)


EY - Beyond 2020 : Forces×

Pension savings in the UK – before auto-enrolment (2011) and projected effect by 2020


EY - Beyond 2020 : Forces×

Reduction of pension tax incentives


EY - Beyond 2020 : Forces×

Public sector net debt as a % of GDP, 1975/76 to 2012/13


EY - Beyond 2020 : Forces×

Return on inward and outward investment from the UK


EY - Beyond 2020 : Forces×

Cost of sequencing the human genome


EY - Beyond 2020 : Forces×

Youth unemployment in the UK


EY - Beyond 2020 : Forces×

Comparison of UK membership of EFTA and EEA versus EU


EY - Beyond 2020 : Forces×

Complaints made to Financial Ombudsman Service


EY - Beyond 2020 : Forces×

UK income and house price growth


EY - Beyond 2020 : Forces×

Number of advisors in the UK


EY - Beyond 2020 : Forces×