Friday, July 25, 2008

Industry Overview

I am working in an industry that I feel has an immediate need to turn its business model on its head as I think they are walking on a very fine tight rope .

In the last twenty years the overwhelming measure in how companies are performing is in how much market share they have, and where they rank in the industry charts at the end of the calendar year.

These rankings are based on ‘New Business’, as defined by the total amount of annual premiums and 10% of single premiums generated in the previous year.

As far as I can establish, the remuneration packages available to all managers, from the top down, are based on the generation of this ‘New Business’. In my opinion, this overhead, along with the general costs associated with acquiring new business is beginning to take its toll on the profitability of Life Assurance Companies.

It would appear that the new business being put on the books is not lasting long enough for these companies to make it profitable. The reason that this is happening is that large tranches of new business are being moved around between each of the players on a regular basis.

I read somewhere recently that the average time that a pension plan, in the UK, stays with an insurer is just 4 years. This is nuts. It seems that the main reason for this is to generate commissions for advisors and I think that this is not sustainable for much longer.

The industry needs to take a good look how they can develop a business model where this mass movement of customers from one insurer to another is nipped in the bud. Suffice to say, the consumer is the one that may ultimately pay the price for these actions.

If the model was changed to a basis where ‘Retention of Business’ played a more substantial role as the main measure of a company's performance and profitability, it would have a positive effect, in time, on the bottom line for the companies and the way in which these companies and their agents are viewed by consumers.

Of course there will be exceptions. These can take the form of consumers abandoning an ‘old’ type plan with prohibitive charges, in favour of a new competitively priced one.

Overall, I would be concerned that the existing structure will begin to show its cracks and start creaking under the weight of the costs associated with acquiring business in the not too distant future.

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