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© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
CAN TRADITIONAL FACE-TO-FACE SELLING SURVIVE AND PROSPER IN THE NEW REGULATORY ENVIRONMENT?
Andy CherkasTillinghast
2004 Life Convention7-9 November
EICC Edinburgh Scotland
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Doom and gloom over face-to-face distribution?
■ Do you recognise these comments or observations?
■ Direct sales forces are dead, they will always be uneconomic■ Low cost stakeholder style charging will increase and limit
further available commission■ The with profit bond market has tanked, never to return■ The housing market is slowing, leaving distributor firms with
holes in their income■ The scramble for multi-ties is on, but the industry cannot
afford more incentives and commissions; it’ll end in tears■ Life insurers have less flexibility than ever to subsidise or
bail out inefficient distribution■ Regulators are determined to create a market for advice and
their actions in so doing will turn people off going to advisers
■ IFAs are old, tired, too small and undercapitalised
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
A hypothesis:survival and prosperity: yes, but not as we know it!
■ Traditional, mass market face-to-face distribution will remain under pressure for all but the best relationship builders
■ The Basic Advice Sandler regime will not make much headway
■ Pensions developments will create substantial new, economic business opportunities for distributors who adapt;■ But the segmentation, scope and standards of advice will
need to be increased substantially■ Life companies will be challenged in developing their
propositions as manufacturers
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Investment specialistsCorporate pensions specialists Mortgage brokersGeneralists
NationalEBC Regional Networks Bank IFAs
IndependentNon network
Corp-orate
Accou-ntancy
ProviderIFAs
First, what do we mean by face-to-face distribution?
“Advice/product
proposition”
Direct offer(Ex
only)
IFANarrow panel
Best ofBreed
Basic advice
(Sandlerproducts)
Multiple products & providers
IFAWhole market
Full advice
Direct sales
INDIVIDUAL, RETAIL MARKET
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
First, what do we mean by face-to-face distribution?
“Advice/product
proposition”
Direct offer(Ex
only)
IFANarrow panel
Best ofBreed
Basic advice
(Sandlerproducts)
Multiple products & providers
IFAWhole market
Full advice
Direct sales
Provider relationship
Singletie
Whole-saler
Multiple ties
Single or multiple
ties
Multiple ties
Whole-saler
Single tie +
gap fill
INDIVIDUAL, RETAIL MARKET
Customer segments(simplified)
Self-directed
Middle income HNWMiddle
incomeMass
affluent
CURRENTLY 50,000 DISTRIBUTORS
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
We all know how resilient IFAs have been.Will they continue to be so?
Distribution mixIndividual business by APE
010
20304050
607080
90100
94 95 96 97 98 99 0 1 2 3
IFA Tied Direct Other
Distribution mixGroup business by APE
010
20304050
607080
90100
94 95 96 97 98 99 0 1 2 3
IFA Tied Direct Other
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
There remains a fundamental preference and need for face-to-face support in more complex areas
■ But can we take this for granted?
Require:• Advisory capacity• Advisory reach• Channel
management• Complex product
manufacturing capability
• Risk management
Complexity of financial need
Need for advice &
endorsement
HighLow
High
Low
Deposits
Pensions
Mutual funds
In retirement
Life wrapped
bondsProtection (basic)
Advisory portfolios
Wealth management
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Basic advice regime under Sandler:not an inspiring picture for “worksite”
A more realistic picture of profitability?
Projected Internal Rate of Return (IRR) Worksite Model
Central Treasury
estimate on 1% AMC
1.5% AMC
for 10 yrs
"Realistic" estimate
+3.5%
IRR%
0
5
10
15
20
15.9%
19.4%
9.5%
Source: Tillinghast analysis based initially on HM Treasury assumptions and Tillinghast’s view of more realistic assumptions
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
4.3%
75% F2F
5.0%
->100bp
6.9%
25% F2F
11.2%
Prem+25%
12.6%
Lapse-25%
20.6%
SH costs-25%
Impact of varying business profile on "IRR run rate“No intermediary involvement; “Stakeholder rich” product mix
0%
5%
10%
15%
20%
75% SH Mix
Basic advice regime under Sandler:but some worksite permutations are economic
Source: Tillinghast analysis
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
4.3%5.0%
6.9%
11.2%
12.6%
20.6%
3.4%3.9%
5.6%
9.3%
10.8%
16.7%
0%
5%
10%
15%
20%
75% F2F ->100bp 25% F2F Prem+25% Lapse-25% SH costs-25%
75% SH Mix IFA @ 50% remote
Basic advice regime under Sandler:but some worksite permutations are economic
Impact of varying business profile on "IRR run rate“Showing impact of intermediary involvement; “Stakeholder rich” product mix
Source: Tillinghast analysis
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Basic advice regime under Sandler:not a happy picture for retail banks
A more realistic picture of profitability?Projected Internal Rate of Return (IRR) Bancassurer model
0
5
10
8.4%
+2.9%
IRR%
0
5
10
8.4%
2.1%
11.3%
Central Treasury
estimate on 1% AMC
1.5% AMC
for 10 yrs
"Realistic" estimate
Source: Tillinghast analysis based initially on HM Treasury assumptions and Tillinghast’s view of more realistic assumptions
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Basic advice regime under Sandler:No priority for this market within retail banks
Minimum premium sizes to make a contribution to fixed and developmental costs
Break-even Case Size – Bank Channel
Savings Pensions
Scenario
AMC 1.5% for 10 years
“Realistic”
Monthly £
48
94
Single £
2,091
2,911
Monthly £
67
116
Single £
2,468
3,113
Source: Tillinghast analysis based initially on HM Treasury assumptions and Tillinghast’s view of more realistic assumptions
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Disclosure of commissions (“The Cost Menu”)will create confusion at first . . .
Initial only50% of your first 12 payments
25 year term
Example 3:Personal and Stakeholder Pensions
Initial and Renewal
Initial, Renewal and Trail
Commission Shapes
37% of your first 12 payments, then 2.5% of all payments from month 13
25 year term
Example 2:Personal and Stakeholder Pensions
25% of your first 12 payments, then 2.5% of further payments and 0.25% of your fund each year
25 year term
Example 1:Personal and Stakeholder Pensions
The market averageExample term or age
Monthly ProductsTable 1: Commission if you pay monthly
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
... and create pressure to standardise commissions
100%
150%
200%
250%
50%
300%
350%
400%
450%
% of m
arket average
SINGLE PREMIUM
Collective investment
InvestmentBond
Annuities Incomedrawdown
Pensions
REGULAR PREMIUM
100%
150%
200%
250%
50%
% of m
arket average
Collective investment
Wholeof life
Pension 10 Pension 25
Source: Tillinghast analysis of range of “Menu” outcomes from data supplied by over 20 providers
Wide variation in disclosed Menu commissions
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Near term trends and prospectsfor distributors look far from rosy
Life/pensions APE £bn
0
2
4
6
8
10
12
2000 2001 2002 2003
Protection Life Pensions
Gross UT sales APE £bn
0
2
4
6
8
10
12
2000 2001 2002 2003
Retail Institutional
At best, a stagnant new business picture
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Near term trends and prospectsfor distributors look far from rosy
The staple diet of WP Bonds is at an end
Single Premium Life ProductsAPE 2000-03: £bn
0.0
0.5
1.0
1.5
2.0
2.5
2000 2001 2002 2003
With profits
Guaranteed equity
Income and growth
Unit-linked
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Com
mis
sion
Agency profit contribution vs commission
Profit contribution
Illustration of value by IFA firms (cumulative)(values changed from client case)
0%
50%
100%
150%
200%
250%
0% 20% 40% 60% 80% 100%
Percent of cases (by IFA)
Perc
ent o
f val
ueVariations in profit contributions channels are huge. Do you know yours?
Illustrations of variations in profit contribution within channels
IFA COMPANYIFA COMPANY DSF PERFORMANCEDSF PERFORMANCE
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
The biggest driver for change and hope for (distributor) prosperity is Pensions Simplification
■ Substantial flow of funds into “retail”, packaged products
■ Customer segments and needs are ideally suited to –and require – face-to-face advice
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Substantial flow of fundsinto “retail”, packaged products
Current UK“Pensions” Assets (£900bn)
Personal/StakeholderPensions
OccupationalDB
OccupationalDC
Personal/StakeholderPensions
OccupationalDB
OccupationalDC
Future (10-15yrs)UK “Pensions” Assets
Source: Tillinghast estimates
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Customer segments and needs areideally suited to face-to-face advice
ProtectionProtection
• Life cover via the pension plan• Reduction in premiums due to tax relief• Tax relief on unlimited levels of
dependants’ pension on death
• Life cover via the pension plan• Reduction in premiums due to tax relief• Tax relief on unlimited levels of
dependants’ pension on death
Small business ownersSmall business owners
• Dramatic tax benefits• Move personal and business assets
into pension plan before retirement• No need ever to buy an annuity• Inheritance tax mitigation
• Dramatic tax benefits• Move personal and business assets
into pension plan before retirement• No need ever to buy an annuity• Inheritance tax mitigation
Executives & EmployeesExecutives & Employees
• Executives: Alternative vehicles to pension & continuous monitoring & advice around the cap
• Employees: DB to DC, developing direct relations via worksite, use of ISAs
• Executives: Alternative vehicles to pension & continuous monitoring & advice around the cap
• Employees: DB to DC, developing direct relations via worksite, use of ISAs
At and in retirementAt and in retirement
• New style investment vehicles that maximise retirement income
• Drawdown becomes the primary option• Tax free cash uncoupled from taking
income
• New style investment vehicles that maximise retirement income
• Drawdown becomes the primary option• Tax free cash uncoupled from taking
income
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Is this the ideal product structure? We needto redefine what we mean by a pension product
“LIFETIME INVESTMENT ACCOUNT”
Drawdown facility
ISA
Shares
Cash
Bonds
Mutual Funds
Lifewrapped
Protection
Cash
UL Funds
WP Funds
Savings Pensionstransfers
Tax-freecash
Non-tax privileged
Shares
Cash
Bonds
Mutual Funds
Pension wrapped
Cash
Property
Protection
Bonds
Mutual Funds
Annuities
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Drawdown facility
ISA Lifewrapped
Savings
Tax-freecash
Non-tax privileged
Shares
Cash
Bonds
Pension wrapped
Cash
Annuities
Shares
Cash
Bonds
Mutual Funds
Protection
Cash
UL Funds
WP Funds
Property
Protection
Bonds
Mutual FundsMutual Funds
Pensionstransfers
The advice proposition needs to be upgradedand upskilled to generate a decent income
“LIFETIME INVESTMENT ACCOUNT”
Assetallocation: throughout
Timing;managing the cap
If and when
If and whenHow much
How much
Advice required
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
WRAP PLATFORM
ADVICE TOOLS
Who will supply and own the infrastructure?Will it be the distributors themselves?
“LIFETIME INVESTMENT ACCOUNT”
Drawdown facility
ISA
Shares
Cash
Bonds
Mutual Funds
Lifewrapped
Protection
Cash
UL Funds
WP Funds
Non-tax privileged
Shares
Cash
Bonds
Mutual Funds
Pension wrapped
Cash
PropertyProtection
BondsMutual Funds
Annuities
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Group DC market: an opportunity tobuild genuine relationships, but for whom?
PROVIDER – WHAT ROLE?
Customer lifetime
Employer 1
EBC1 EBC2
Employer 2
Vesting
IFA/adviser
IFA/adviser
IFA/adviser
IFA/adviser
IFA/adviser
IFA/adviser
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Life insurers: what role to play?Large opportunities and substantial threats
Administrator TraditionalLarge
corporate DC
Wrap/aggregation
Packager Manager of Managers WorksiteWrap/aggregation
Distributor Own advice proposition WorksiteWholesaler
Investment deal (what is distinctive?)
Cash EquitiesCapital intensive
Guarantees/smoothingAnnuities
Corporate bonds &
mortgages
Protection provider Term AnnuitiesMedical
expensesDisability Critical illness
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
“Product push”, “jam today”, lower business
quality; a pressured business
Aligned to segments needs, large case sizes, relationship based, asset based
Don’t need or can’t get advice; thin margins and modest volumes
A new three way polarisation?
INDIVIDUAL, RETAIL MARKET
“Advice/product proposition”
Direct offer(Ex
only)IFA
Narrow panel
Best ofBreed
Basic advice(Sandler
products)Multiple
products & providers
IFAWhole market
Full advice
Direct sales
Provider relationship
Singletie
Whole-saler
Multiple ties
Single or multiple ties Multiple ties Whole-
salerSingle tie + gap fill
Customer segments(simplified)
Self-directed Middle income HNWMiddle
incomeMass
affluent
© 2004 Towers Perrin S:\06 Professional Bodies\Institute of Actuaries\Seminars-Conferences\Life Convention 2004\ASC-pre-Can traditional face-to-face selling survive & prosper.ppt
Summary:a future, but a different one
■ Traditional face-to-face distribution of current product sets with current advice propositions will remain under pressure for all but the best relationship builders
■ The Basic Advice Sandler regime will not make much headway■ Banks will not make it a priority■ Worksite for employees remains a possibility
■ Related developments in Pensions and worksite will create substantial new business opportunities for distributors; but:■ The standard, scope and frequency of advice will need to increase
significantly to justify economic distributor incomes■ Charges on top of commodity levels will be possible if this is
achieved■ Advice propositions will need to be carefully developed for diverse
segment needs -- including asset allocation■ Worksite will develop opportunities for executives with full advice
and for employees via low cost variations■ Life companies will be challenged in developing their propositions
as manufacturers