The launch of NatWest Life will be followed next month by Abbey National Life. Leeds Permanent Building Society is expected to announce similar plans soon. Meanwhile established 'bankassurers' such as Lloyds Abbey Life continue to see scope to increase sales of life insurance and pensions to their huge customer bases.
Some believe the bankassurers, which combine banking with life insurance, could have 50 per cent of the market by the end of the decade.
NatWest claims its new life company is the largest yet launched. It has start- up capital of pounds 150m and its 1,900 salespeople are expected to sell more than 200,000 policies this year, bringing in premiums of about pounds 800m. Much of this will be taken in the form of lump sum investment bonds. It expects immediately to become one of Britain's top 20 life offices.
NatWest is the last of the major clearing banks to explore the possibilities of bankassurance. The bank has until now been an independent financial adviser (IFA), recommending to its customers the 'best' policy to meet their needs. But as other would-be independents such as Halifax Building Society quickly discovered, most people have little interest in this supposedly premium service. The endowment plan taken out in conjunction with a mortgage loan is frequently little more than an afterthought.
Lawrence Churchill, chief executive of NatWest Life, claims the recommendation of the 'best' policy often made the opposite of the desired impression: 'Customers would say, 'who are these Friends Provident people? Never heard of them.' The bank's name is better known and better trusted than those of even the best life companies.
On top of this, crucially, the banks and building societies can make more money selling their own products than someone else's. Quite apart from taking the 'manufacturer's' profit margin, with distribution secured, banks have no need to price their products particularly attractively. Having said that, Mr Churchill says that NatWest Life aims to price its products more cheaply than most.
The life insurance industry is in poor shape to face this strong competition from the banks and building societies. Life offices are under attack from all sides for, among other things, their failure to offer good value for money to those who cash in their savings early and their inability to keep proper control of their salesmen. The industry is unloved by both the regulators and the Office of Fair Trading.
Standards of customer service are frequently poor. Mr Churchill, by background a systems man who was previously a director at Allied Dunbar, is determined that NatWest Life should be at the leading edge for quality of administration. It aims to issue a policy within three days of receiving a completed proposal form. By comparison, one leading Scottish office is reputed to take 20 days.
Most vulnerable to the threat posed by the banks and building societies are the mutually owned life offices which receive the bulk of their business from IFAs - companies such as Norwich Union, Standard Life, Scottish Widows, Scottish Amicable, Friends Provident and Clerical Medical.
These companies are seeing their largest suppliers of business turn into competitors. NatWest has been one of the biggest IFAs. Abbey National has placed all its business with Friends Provident for the last five years. The Leeds currently sells for Norwich Union.
The mutuals were slower in securing alternative channels of distribution than shareholder-owned companies such as Legal and General and Equity and Law. The solution that most of them turned to, the appointment of firms of tied agents, has caused as many problems as it has solved because of regulatory issues.
Philip Scott, general manager (finance) at Norwich Union, says that 'appointed representatives are at somewhat of a crossroads'. Norwich Union is placing more faith in its new direct salesforce, though it has yet to be seen whether it is any better at managing this than it was its tied agents.
Scottish Mutual, which Abbey National bought for pounds 285m to help it create Abbey National Life, has decided to abandon tied agents. Prolific is likely to consider a similar move after its recent acquisition by Scottish Provident.
Maurice Paterson, deputy managing director of Scottish Amicable, disagrees that the mutuals are any more at risk from bankassurance than other life insurers. He does not believe the banks will take that much business from independent advisers, who will continue to handle a lot of upmarket clients and pensions business.
Norwich Union's Mr Scott says a significant part of the market, perhaps two-thirds, will remain open to life companies and the market itself is expanding. He says the IFA sector is 'still the most profitable and most successful distribution channel in this country'.
Life insurers will have to compete much more on cost in future because of the regulators' determination to enforce better disclosure. In any case, cost will become more important if, as expected, investment returns fall.
Although life offices have resisted better cost disclosure, Mr Scott believes this may offer them a competitive advantage over the banks. He says: 'The banking type institutions are moving into having captive insurers because they expect to extract more profit for their shareholders. They are not intending to produce better returns for their customers. The way the bankassurers are designing the product is guaranteed to produce less value on early surrender than from someone like ourselves, who traditionally pay out good values.'
All the same, life offices seem likely to lose much of the bread-and-butter mortgage business on which they prospered in the 1980s to the building societies and banks. Moreoever, the future of the IFA sector is itself uncertain because of separate difficulties with finding an acceptable way of paying for investors' compensation claims.
Peter Ford, joint actuary at Clerical Medical, NatWest's joint venture partner, whose systems formed the basis of those supplied to NatWest Life, says it would be stupid not to recognise that the banks will take some of the market.
He added: 'We've got to work a bit harder to still justify our existence. If we keep the track record going and continue to invest well, we will continue to have a good future. People want good investment expertise. If the mutuals deliver, then hopefully they will still come to us.' Clerical Medical will be NatWest Life's investment managers.
NatWest Life is based close to Clerical Medical's own offices in Bristol. It will initially employ 640 staff, though this will rise to 1,000.
Mr Churchill said: 'We've been training now for so long and so hard . . . We're now really looking forward to the match.'
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