Aegon stunned advisers with the announcement last month that it was stopping writing group risk business with immediate effect. It gave the reason for doing so as being because it does not consider the sector has potential to return it good profits.
The insurer says that in 2008 Aegon Employee Benefits contributed less than 2 per cent of Aegon UK’s APE new business figures and its group risk business will be wound down completely over the next 24 months.
Some advisers have expressed surprise that Aegon was not able to find a buyer for its book, rather than withdraw. Whether the reason it has not been able to do so is because of the tightness of the margin on the business it had written is a matter of speculation.
But the fact of Aegon’s exit relating to lack of profitability could point to a hardening market in future.
A number of providers have offered to take on business on the same or improved terms as Aegon were offering, up to the end of the rate guarantee period. But what rates providers would offer after that is unclear.
What is clear is that Aegon is pulling out because it feels it can get a better return on its capital elsewhere than in group risk. On announcing its withdrawal, the insurer said: “The move is in line with Aegon’s strategy to focus on markets and products with good profit potential and with opportunities to gain a sizeable market presence. Aegon believes there are better opportunities to pursue growth in more profitable areas such as pensions, individual protection, investments and annuities where it already has a sizeable market share.
Bob Cheesewright, group risk proposition director, Zurich Corporate Risk points out that previous provider exits from the group risk market have not been caused by return on capital issues. “Until now no group risk provider has pulled out of the market because they couldn’t get sufficient return on capital,” says Cheesewright.
If Aegon could not get a decent enough return on capital from its group risk book, one could argue that no provider could, explaining the lack of a buyer, which in turn raises the question of whether today’s prices are the right ones.
Cheesewright believes the exit of Aegon may mark a new dawn for pricing across the market. Cheesewright says: “It would not surprise me if market prices move up, and investors in providers would be happy if they did. Perhaps prices have been too generous to consumers.”
Such a change would reflect the experience of pensions distribution, where a period of providers complaining of intense pressure on pricing has gradually been replaced with a more selective approach to offering business terms.
Andy Stephenson, group risk national sales manager at Aviva disagrees. “Our group risk product offering is one of the strongest lines of
business for Aviva,” he says. “Aegon only had 6.5 per cent of market share for group life and 3 per cent for group income protection so they did not have the scale of other providers.”
While some advisers have criticised Aegon’s admin prior to their withdrawal, many are applauding the provider on the way it is conducting its withdrawal. Jamie Winter, at Watson Wyatt says: “I would have to say that Aegon should be congratulated for the pragmatic way they are handling their exit from the market. They are being supportive about the transition, and at the moment things are going smoothly.”
Sue Sneddon, employee benefits technical manager at Aegon and chairman of the regulatory working party at GRiD, will oversee the handover of clients to new providers over the next two years. Simon Bailey, former head of marketing, head of service, employee benefits at the provider has now become head of customer knowledge and analysis within Aegon’s strategy team.
Advisers are out there trying to get the best deal for their clients but some providers warn that if tighter margins are around the corner, the knock-on effects will be felt throughout the sector. Cheesewright believes that an industry that puts price above all else
will stifle technological innovation as providers will not have the spare capital to pay for the development of better processes. “People are always complaining about the quality of service, but if providers cannot invest enough to sort out service problems then it is going to stay dire.”
That said, margins are generous enough to have enticed Zurich into the market, and the usual rumours about others looking at following them in persist. One of the names talked of in the past, Hartford Life, now looks unlikely to do so, having pulled out of the variable
annuity market earlier this year after entering the market just four years ago. Any prospective new entrants will only make an impact if
they can convince intermediaries that they are here to stay.