Some life insurance firms could struggle for survival under the pressures of new regulation and a challenging economic environment, according to a new report by professional services firm Deloitte.

The report, “2005: UK Financial Services at a Watershed” looks at the impact of regulation on banking and life insurance markets and is based on a survey of leading financial institutions.

Deloitte finds that an avalanche of regulatory initiatives and new business economics is poised to change the face of UK retail financial services over the next 3-5 years, with the full impact of Treating Customer Fairly principles, Senior Management Responsibilities and the Sandler Review likely to be felt during 2005.

The report notes that making the transition to the new financial landscape will require capital and Deloitte argues that some firms, notably the larger institutions and particularly the banks, have a distinct starting advantage. Critically, the larger firms have economies of scale, cheaper regulatory capital and the diversity to be able to shuffle their business portfolios. Some niche players will benefit from their focus and ability to move swiftly. Larger insurers need to capitalise on their customer relationships.

Of all types of financial services firm, Deloitte predict the prospects for smaller to medium life insurance companies will be the least rosy. One of the key concerns is that the impact of regulation disproportionately increases the cost base for the smaller firms.

Commenting on the findings, Chris Gentle, the report author and head of financial services research at Deloitte said: “Adapting to a regime with lower margin products and longer pay back periods will be a drain on capital for all types of financial services firm. In the case of life insurance, this is happening at a time when balance sheet capital is already in short supply and some smaller life companies may have difficulties generating an acceptable return on capital. The key to success lies in insurers turning their knowledge of longer-term savings products to their advantage.”

The report also addresses the impact of change on consumers and suggests that as margin pressures and the regulatory burden mounts, so too does the likelihood of savings and investment products diminishing in number and variety.

Chris Gentle argues: “An unintended consequence of regulatory and public policy initiatives may be the general public being offered a narrower range of standardised savings products with less access to quality advice. Contrary to political imperatives, the proportion of society without savings or a pension could in fact grow. Policymakers may not have foreseen these consequences but are likely to act in response,” said Gentle.

Russell Collins, head of Deloitte’s UK financial services practice, adds: “Arguably, not since the wide-ranging liberalisation of financial services activities in the 1980s has regulation driven such dramatic change. By 2010 the UK financial services landscape will look very different and this change will accelerate in 2005. There will be no place for sub-scale institutions in the future financial services landscape. As a minimum, financial services organisations need to find a better way of handling the flow of regulatory initiatives, often from the European Union or other international bodies, and to stem the resulting increases in their cost base.

Those thinking strategically now – and taking action accordingly – will secure a stronger competitive position when the dust settles.”

Ends

Notes to editor:
The report is based on interviews with senior management of large retail financial services institutions, and a survey of more than 50 regulatory and risk directors in the UK. Both exercises were conducted during the winter of 2004.

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP.

Deloitte & Touche LLP is the UK's fastest growing major professional services firm. 

The firm is based in 21 UK locations, with over 10,000 staff nationwide and fee income of £1,246 million in 2003/2004. It is a member firm of Deloitte Touche Tohmatsu, a leading professional services organisation, delivering world class audit, tax, consulting and corporate finance services, with around 120,000 people in over 140 countries. Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity.

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.

The information contained in this press release is correct at the time of going to press.