A MATTER OF LIFE AND DEATH

“When I get older, losing my hair, many years from now… will you still need me, will you still feed me…?”

Those who listened to The Beatles’ “When I’m Sixty-Four” track 30 years ago, and expected to draw a state pension by the year 2000, are in for a disappointment – the Government’s answer will be “no”.

It’s a sobering thought for those nearing retirement without a private pension to fall back on. But while the state pensions time-bomb is ticking away, the private pensions and life insurance companies are in a deep crisis of their own.

Last year, pensions and life insurance companies spent vast sums on advertising, using money reaped from increased premiums and sales (MW March 18, 1994) but the first quarter of 1995 proved an unmitigated disaster for the industry.

Allied Dunbar’s sales fell 29 per cent in the first quarter, and The Prudential’s sales of single contribution pensions fell from 66m to 8m. Analysts think industry-wide sales were down by up to 30 per cent in the first three months of 1995. And at London Life, where pensions made up nearly half the company’s new business, it was forced to pull out of the market altogether after recording a sales fall of 25 per cent in the same period. Observers predict that the number of life and pensions companies will halve in the next two years.

To compound their problems, new entrants emerged this year. Direct Line began selling life insurance in February. Marks & Spencer started selling pensions and life insurance over the phone in May. And Virgin Direct an-nounced its intention to move into pensions and life insurance when it launched its PEP products.

These companies are helping to drive prices down. A Direct Line spokesman claims: “A significant number of consumers consult financial advisers and the salesforces of life companies and then come to us for the sale.”

High street banks and building societies have also joined the cut-price bonanza, forcing the existing companies to cut premiums, further eroding margins.

The problems run deeper. According to a report released last month by The Henley Centre and re-insurance company Swiss Re, a survey of 1,500 adults revealed that if premiums were comparable with life companies; 39 per cent of adults claim they would consider buying life insurance from The Post Office; 25 per cent said they would consider buying from a high street store; and 18 per cent from a motor manufacturer.

Bad publicity on pensions mis-selling, pension transfers, and overcharging has affected sales. The most immediate problem stems from the introduction of disclosure rules in January. Salespeople must now inform the consumer how much commission they are taking, and need to spend hours with the customer filling in forms with personal details. In addition, familiar names such as Guardian Insurance, Save & Prosper and Commercial Union have been forced to offload their self-employed direct salesforces.

Commercial Union marketing services manager Rob Morley says the company pulled out of direct selling by commission, through transferring its salesforce to Abbey Life. “We will continue with a salaried face-to-face salesforce for our existing customers,” he says, “but not for new business, that will be left to independent financial advisors. In a few years there will only be four to five companies with a direct salesforce.”

But, according to NatWest marketing director Raoul Pinnell: “The big issue is trust, not distribution.”

In the Swiss Re report only seven per cent of consumers said that they had respect for life insurance salespeople, one per cent above the least respected – estate agents. IFAs fared slightly better on 12 per cent, but bank and building society staff enjoy the respect of 29 per cent of respondents.

The reasons are not hard to see, according to one pensions analyst. “Life and pensions companies only have themselves to blame,” he says. “For years they deliberately confused consumers with jargon, blinding them with technical language and pressurising to do the deal – they were worse than used car salesmen. Now they are paying the price.”

Duncan Mackechnie, head of direct sales at Scottish Widows, says: “The breakdown of trust started ten to 15 years ago when the industry started to adopt pushy US selling techniques. It only has itself to blame.”

There has also been a tendency for salesforces to adopt a sales-driven approach rather than emphasise customer service.

Marks & Spencer’s avowed intention to cash in on the public’s distrust of insurance companies led to the launch of its “advice-free”, execution-only, freephone life and pensions scheme in May.

And according to a spokeswoman from Virgin Direct, Richard Branson’s financial arm intends to do the same. “There is obviously an opportunity to capitalise on the low esteem the life companies are held in, with intrusive salesmen who spend four hours in your home fact finding,” she says.

Some commentators suggest that an industry-wide campaign is needed to rebuild trust, but such an option is rejected by most. NatWest’s Pinnell, who is a former marketing director of The Prudential, says: “I am not a great supporter of industry-wide initiatives. Many people interpret such campaigns as a club of vested interests and it will not get around the problem of rebuilding trust.”

An Association of British Insurers spokeswoman acknowledges that there is an image problem to be addressed. She believes that the important task are disciplining offenders and working with regulators to get the product right. “We need to sort out the problems first and then try to rebuild confidence,” she says.

CU’s Morley believes that trust has to be established by the independent financial advisers (IFAs). Disclosure has revealed them to be glorified commission-based salesmen with an air of independence. “They need to convince people they are trustworthy,” he says. “There will be a gradual move towards fee-based advice, in 20 years the market should be entirely fee based.”

Pinnell says: “Banks are better placed to build on trust than life companies.” He says they can build on the trust of bank managers and bank staff. “Fifty-six per cent of NatWest customers say they would come to us for advice on life insurance, only two per cent say they would go to life companies,” he claims.

This may be because life and pensions companies have notoriously weak brands.

Peter Mills, finance sector forecaster at The Henley Centre, says: “There isn’t much difference between brands, they all begin with Scottish and end with Life. Whenever a Scottish Amicable advertisement was shown the recall for Scottish Widows shot up.”

And The Prudential’s award-winning “I want to be” campaign is understood to have achieved brand attribution of only ten per cent.

Weak differentiation means consumers are more willing to consider buying life insurance from other sources, says Mills.

In response, some life and pensions companies are known to be considering entering the phone sales market themselves. But the cost of setting up a fully trained telesales operation is enormous. They have the double restructuring expense of laying-off existing sales staff, and investing in new systems.

Some, such as Allied Dunbar, have decided to concentrate on what they know best; direct home sales. It now has a salesforce of 4,300 and aims to recruit 850 sales staff from within the industry this year.

There is some evidence that salespeople are finding other ways to get around disclosure problems. “Some salespeople fill in the forms themselves afterwards to complete the sale,” claims one insurance company source, “which is definitely not what was intended.”

The Prudential’s strategy is to batten down the hatches and seek expansion through overseas acquisitions.

Others, such as Commercial Union, have restructured while trying to develop a loyal customer base. Last month it launched the first helpline loyalty card for insurers.

Banks and building societies who sell policies, dubbed “bancassurers”, benefit from a high street presence and from strong brand equities. And, as Pinnell says: “Banks can offer a much wider range of products than the life companies who offer a narrow product range.”

Analysts predict that banks and building societies will hold 50 per cent of the life insurance market by the end of the decade.

One way of helping to build life and pensions companies as brands would be to give them a high street presence, by buying building societies or other retail outlets. Or, another way may be to get the existing salesforces to sell other services, in much the same way that the Automobile Association has declared its intent to move into home repairs.

Some insurers are already responding to the erosion of their core base by attacking others. Scottish Widows, one of the strongest brands, is setting up phone banking. Donald Aiken, treasurer of Scottish Widows Bank, says: “It is intended as a safe-haven from predatory clearing banks. We are not moving into direct competition with the banks, merely protecting our customer base.”

As the spokeswoman for the ABI says: “In the future there may not be standard life insurance companies as we know them. The dividing lines between the different sectors will blur.”

The pensions industry’s saviour may well be the demographic time-bomb. The number of old people will rise significantly over the next four decades. The number of people over 75 is 3.9 million; in ten years it is forecast to rise to 4.6 million.

Older people are expected to take up greater amounts of state provision. It has been estimated that those who live beyond 75 consume 80 per cent of their total healthcare costs in the last five years of their life.

All political parties admit that pensions are in dire need of an overhaul. And though the Government privately acknowledges that state pensions will be abolished, admitting as much publicly would prove politically disastrous.

Ironically, the one factor preventing the pensions industry from raising the lack of state provision as an important social and political issue is the level of public distrust. It would be accused of scare mongering. “We are on a hiding to nothing,” says the marketing director of one of the big five life companies, “you’re beggared if you do raise it, and beggared if you don’t.”

To echo an often-expressed view, maybe the industry has only itself to blame.

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