Insurers feel the heat from the high street: Banks and building societies aiming for half of pounds 17bn market

WHEN Kyle Bosworth took early retirement last year from Reed Elsevier, the publishing giant, he had a nest egg of pounds 45,000 that he wanted to lock away for 10 years.

Anyone in that position as recently as the mid-1980s would almost certainly have taken out a policy with one of the traditional life assurance groups. But Mr Bosworth took out a NatWest Life Gilt Plan, backed by a Flexible Investment Bond.

'I had had a bank account for many years with NatWest's branch in Fleet Street,' 55-year-old Mr Bosworth explained, 'and their life assurance people were the most convincing of those I spoke to.'

So Mr Bosworth became yet another saver to succumb to the growing trend towards 'bancassurance', the phenomenon whereby banks and building societies have set themselves up in competition with the life assurance establishment.

The word originated on the Continent, where regulations permitted banks and insurers to merge earlier than in this country. But British banks and building societies have charged into the once-placid life market since the Financial Services Act came into effect.

Barclays, NatWest and TSB have their own life operations. Lloyds controls Lloyds Abbey Life. Midland Life is a joint venture between Midland Bank and Commercial Union. Royal Scottish Assurance is owned by Royal Bank of Scotland, headed by George Younger, and Scottish Equitable. Abbey National has bought Scottish Mutual. Woolwich formed Woolwich Life as a joint venture with Sun Alliance, and Britannia Building Society has injected the Life Association of Scotland into its Britannia Life company.

According to the Association of British Insurers, they have carved out a 13 per cent market share from next to nothing seven years ago. And last September, Royal Bank of Scotland's controversial motor insurance subsidiary, Direct Line, founded by the high-earning Peter Wood, applied to the Department of Trade and Industry for authorisation to sell life insurance. It may also sell mortgages in future.

All this activity is hardly surprising: the stakes are high. A survey last year by Coopers & Lybrand, the accountancy firm, had an unnamed senior bank executive saying: 'We have increased cross-selling of insurance to our customers from 3 per cent to 6 per cent over the past three years: if we can get it to 15 per cent, it will achieve a huge additional profit.'

At the end of the rainbow is a shared vision among the bankers of financial supermarkets offering everything from pocket money to pensions, with the gamut of savings and insurance products in between.

Even though the banks are keen to play down the scale of their invasion for fear of attracting regulatory hurdles, they admit to aiming for half the market, which is worth pounds 17bn a year in premiums. They cannot achieve that without inflicting considerable pain on the specialist insurers. Some observers claim the bancassurance battalions could take over life assurance entirely.

Alistair Darling, Labour Party spokesman on the City and financial services, said: 'If the trend to bancassurance were to continue, you might come down to only five or six insurance suppliers - all either banks or building societies.

'Stand-alone insurance companies might be squeezed out or absorbed. The industry has to be in a position to compete on a Europe-wide level, but I strongly believe that there ought to be diversity of insurance production and supply.'

The Banking, Insurance and Finance Union is also concerned. Last week, Bifu said it was writing to the Banking Ombudsman to seek a meeting to discuss the issue.

'Staff will be under pressure to sell, the customer will be under pressure to sign up, and we face a whole new wave of customer complaints,' said Ed Sweeney, the union's deputy general secretary.

The latest proposals from the Securities and Investments Board, demanding prior disclosure of commissions and surrender values, may further favour the bancassurers.

A survey by the Life Insurance Association has disclosed that about one in three tied agents will leave the industry if their income is cut because of having to tell would-be policyholders how much commission they will be paying out. That is a virtual certainty if the SIB has its way, and would create a huge gap in the market that the bancassurers could exploit.

'Greater transparency is bound to favour the bigger players,' said Peter Ellwood, chief executive of TSB Group, which has had its own life arm for 20 years.

The bancassurers have two key advantages over their specialist counterparts: large customer bases and the ability to spread overheads more thinly. Michael Wadsworth, a partner in R Watson and Co, consulting actuaries, estimates that the average insurance sales agent based at a bank or building society has a success rate four to six times as high as the average insurance company agent, who relies on so-called cold calls on the doorstep or by telephone.

Consequently, selling insurance policies through banks and building societies is cheaper than traditional avenues. Part of that benefit may be passed on to policyholders if competition intensifies.

Mr Wadsworth predicts that by the year 2000 bancassurance will account for 30 to 50 per cent of the British retail financial services market. That is borne out by Lawrence Churchill, chief executive of NatWest Life, which began a year ago and already claims to be among the country's top 15 life companies.

But the big insurance groups are split over the size of the threat. David Prosser, Legal & General's chief executive, is confident the specialists will come out on top in the long run. 'What the average consumer wants is someone to talk to about their problems who will be around in five years to answer their questions. There is a lot of cultural preference in consumers' minds,' he said.

But Mick Newmarch, the Prudential's larger-than-life chief executive, is hedging his bets. He said: 'I think the jury must be out on bancassurance. So far, the banks have been cannibalising their own customers, and they have the advantage of starting from scratch. But on the other hand, they obviously have no experience - therefore, they are learners.'

Some of his lieutenants are less sanguine. Laurel Powers- Freeling, director of corporate strategy and planning at the Pru, admitted: 'A year ago we thought banks were a threat, not very well managed but enough to make problems simply through making the attempt to enter the market. Now we have moved on from that. We have begun to look at bancassurance as a much more serious threat. The competition is hotting up.'

Although bancassurance is a relatively recent phenomenon, banks have been dabbling with insurance for many years. More than 40 years ago, Lloyds allowed branch managers to act as brokers, giving independent financial advice and keeping the commissions they earned. Lloyds stopped the practice in the 1960s, but only at the price of having to compensate managers for giving up commission income. 'Some of them made more money as insurance brokers than they did as branch managers,' said Brian Pitman, chief executive of Lloyds.

The growth of bancassurance springs from the commercial opportunities unwittingly handed to banks and building societies by the Financial Services Act. One effect of this act was that insurance sales agents had to choose either to tie themselves to one company, selling its policies exclusively, or go independent. But banks and building societies quickly discovered that many customers did not appreciate the difference between tied selling and independent advice. Indeed, some were said to be miffed to find their bank, whose name they knew and trusted, recommending they take out a policy with an insurance company of which they had never heard.

Tying themselves to one company was immediately attractive because insurance companies pay higher commissions to anyone selling their products exclusively. The logical conclusion was for the banks and building societies to have their own insurance operations under their own names.

Mr Pitman said: 'Our market research showed that, if we sold our own products, our customers would buy them. And our analysis showed that underwriting would be more profitable than broking.'

The banks are also concerned that Britain's demographic trends towards an ageing population will increase demand for long-term savings and investments at the expense of credit and short-term savings such as deposit accounts.

Mr Ellwood at TSB believes marketing considerations were as important to the rise of bancassurance as regulatory changes. 'Over the last five years, financial service providers have begun to realise that consumers have different needs that can best be met by a combination of banking and insurance.'

But the bancassurers do not have a clear run. The Mintel research organisation has found a significant reduction in the number of people seeking financial advice from banks, while more are flocking to independent financial advisers.

A third of financial services users claim to have received no advice from banks at all. More than half agree with the statement: 'Once, banks used to give you impartial advice - now they are always trying to sell you something such as life assurance.' Not surprisingly, Mintel found that fewer savers intend to go back to their bank manager for advice.

Jean Eaglesham, head of the money unit at the Consumers' Association, added: 'We don't see anything intrinsically wrong with bancassurance. Our concerns are much more with the way insurance products are sold and particularly the way they are increasingly linked to mortgages.'

But while the SIB and other regulatory agencies may keep an avuncular eye on consumers' interests, some long-established insurers could be cruelly exposed to the new winds. The pressure will mostly be felt by the mutuals, according to Paul Hersey, one of Mintel's senior analysts: 'We are seeing a situation where the number of pure life companies will decline. The number of players in recent years has grown, but mainly through bancassurance, which has been taking the middle ground of bank customers.'

But the bigger mutuals are confident they can survive. Tom King, marketing manager for Standard Life, said: 'I don't think the market is going to expand sufficiently to accommodate all the players, so we are going to be fighting for our share. But bancassurers don't do with-profit contracts, and we have always said that people should have some money invested this way as it offers a relatively smooth and secure build-up.' He noted that Standard's free capital amounted to pounds 5.5bn, so that was not a constraint.

Realistically, it looks as if market forces will produce the sort of consolidation that took place in banking in the 1960s, leading to the present domination by half-a-dozen large groups.

(Photographs omitted)