View from City Road: Insurers face a harsh world

As a career prospect, selling life assurance and pensions has about the same social cachet as that of a used car dealer. The ground beneath this beleaguered and unpopular industry is shifting so fast that it is hard to believe it can survive the decade in its present form.

Sales of new life assurance and pensions products have been falling sharply this year. Adverse publicity over the mis-selling of pensions and the subdued mortgage market, which hits sales of new endowment policies, are only part of the reason.

The tail-off in endowment mortgages, which account for 40 per cent of new life assurance premium income, cannot be blamed entirely on the housing recession, or even growing public suspicion that mortgage endowments will not grow fast enough to repay the loan. Nor can the slide in pensions business be put down solely to concern over high-pressure selling methods.

No, there are much more worrying underlying influences at work here. The first and most immediate is commission disclosure, from next year. To take the sting out of disclosure, life companies are concentrating on devising new commission systems with less frightening front-end loading. Even so, many life products are likely to be revealed as uncompetitive against the alternatives once charges are opened to the full light of day.

Spreading management charges over the life of a product rather than front-end loading them will also require deep pockets and big balance sheets. Smaller companies will find it hard to compete; consolidation looks inevitable.

Underlying all this is a much longer-term trend - the destruction of the industry's tax advantages. The end of tax relief on life assurance a decade ago seems to be on a slow fuse. Ending the subsidy reduced the gearing on premiums and forced the industry to sell on cost and performance, neither of which looks particularly competitive when analysed in detail.

The recent focus on poor early surrender values is one more development on the same theme. Without tax relief, life policies must continually prove their merit as investments. That has not stopped sales growing, but it looks almost certain that last year was the peak.

A further threat comes from another longstanding tax change, the incentive the Government has given to invest in PEPs and Tessas. A tax-neutral investment is now forced to compete on unequal terms with two that have solid tax advantages. As a result, life companies are being forced to refocus themselves as savings companies, selling PEPs, unit trusts and health care alongside their traditional products. Indeed, the term 'life assurance' is largely irrelevant. In future, such products will need to be marketed as long-term savings plans.

Increasingly, life companies are in direct conflict with specialist investment management firms and with highly capitalised banks and building societies keen to expand into insurance to sell the same range of products.

With such competitors on their patch, stand-alone life companies will find themselves progressively up against it. The distribution networks available to banks and building societies are stronger and - because they already exist to sell other products - of marginal cost.

As for investment performance, most life companies have no natural advantages over bank or specialist fund managers, and those that fall behind may disappear. Ominously, the bond market rout this year may have hit the insurance industry's asset values rather harder than other fund managers'.

It is always possible that a Labour government will slash the tax relief on PEPs, tilting the playing field back towards long-term savings products. (Labour has said nothing since, before the election, it criticised the effectiveness of PEPs in generating savings.) But changing the tax rules again will be no panacea. For the life companies, a harsh and fiercely competitive world looms.