There is an air of cautious optimism in many industries, including the life assurance sector. Tom Browne, CEO, Friends First discusses the road that must be taken to rebuild the life insurance industry and the importance of delivering on trust and transparency.
The state of the life insurance and pension sector can be seen to reflect that of the underlying economy. If the economy is doing well, this sector tends to do well and vice versa, with new sales volumes falling by two-thirds between 2007 and 2012. While sentiment is undoubtedly improving substantiated by GDP growth and revenue tax returns, the level of growth in the market is constrained by the continuing impact of austerity measures.
Latest CSO figures show a 7.8% fall in average weekly earnings, between the end of 2008 and the third-quarter of 2014, which hardly creates an ideal environment for convincing consumers to think about investing in their future. Thankfully, things are starting to pick up, and 2014 saw a 10% growth in new sales over 2013 levels. There is good growth but it is coming from a low level as compared to 2007.
Future proofing investments
Overall, we are concerned that the need for protection and savings for retirement have fallen down the public’s list of priorities given these difficult times. This is a result of lower real incomes and also many consumers taking a shorter view on funding for their retirement.
Our annual consumer research indicates that 40% of households in Ireland do not have any private pension cover. Obviously, these are decisions and choices that each individual has to make but there seems to be an excessive short-term focus. This, in turn, may lead to some damage downstream because people haven’t funded adequately for their retirement. As the economy and real incomes improve, it is vital that we educate consumers on the need for long-term financial planning.
The recently announced reduction and eventual removal of the pension levy – which has siphoned €2bn from private sector pensions over four years – are steps in the right direction. This phasing out of the measure is expected to provide savers with greater certainty and encourage additional workers to save for their retirement.
We don’t have to look to the distant past to recall the damaging effect which risks to integrity can have on the financial performance of a company, causing a knock-on effect for customers who have invested in their products.
The level of growth in the market is constrained by the continuing impact of austerity measures.”
Transparency in the life insurance industry will go a long way in building trust and reputation. Product charges need to be understood better by customers and reduced by providers, and this has happened in recent years. In addition, understanding the investment risk and reward trade-off is more important for customers as the outcome of their savings, investment or pensions policies is determined – to a large extent – by how and where their monies are invested.
Customers need to understand what – if any – are the risks of their investment falling in value and by how much. This type of transparency is far more important for customers over the long-term. The industry has now introduced a standard approach to categorising investment funds in terms of volatility and we believe this is a major step in the right direction.
Regulation in the life insurance industry is strengthening too with Ireland waiting the final ratification of European regulation on disclosure of product charges and adviser commissions. This will ensure a customer is clear as to what they are paying for, at point of sale, through commissions and charges deducted from their product, by the product provider.
It should ensure clients are aware of both the cost and value of the advice provided to them over the term of the product. And it will encourage insurers to simplify the charging structures of products so that customers can more easily understand the level and frequency of charges.
This is a year that needs to be about addressing these challenges. We have begun a process of encouraging consumers to start taking a long-term view and make proper financial provisions for their future. It is not about buying products but about having a clear and funded roadmap to ensure that they can meet their long-term financial and life goals.