WHEN the underpinnings of an industry change, the effects may seem slow and limited for a while, only to prove surprisingly speedy later on. Europe’s life-insurance industry provides a case study. The demerger announced on March 14th of Prudential is the latest in a flurry of activity prompted at least partly by shifts in European regulation over two years ago. Britain’s largest insurer (unrelated to the American insurer of the same name) is splitting off its British and European business into M&G Prudential, which will be largely focused on asset management. The remainder of Prudential will be left as an insurer in Asia, America and Africa.
Life insurers have been hurt by a prolonged period of low interest rates, prompting them to move towards investment-like products that leave more risk with policyholders, and away from products with guaranteed returns, such as annuities. More stringent capital requirements in the European Union for insurers from the beginning of 2016, under a set of rules called Solvency 2, mean that life insurers must now hold much more capital against annuities than against investment products.
This has prompted some European insurers to diversify their sources of revenue. The purchase by AXA, a large French insurer, of XL Group, a Bermuda-based insurer and reinsurer mainly active in property-and-casualty insurance, announced on March 5th, was partly driven by AXA’s desire to become less reliant on life insurance, with its heavy requirements for capital.
In Britain the dual pressures of a tough investment environment and Solvency 2 have caused the life-insurance industry to split into two camps, says Arjan van Veen of UBS, a bank. In the first are those that have doubled-down on a traditional “capital-heavy” business model; in the second, those that are busy shifting to a more “capital-light” one. The first camp includes Legal & General and Phoenix, which still offer annuities and guaranteed products. Prudential falls into the second, alongside Standard Life Aberdeen, which shifted earlier than most toward investments, to the point that it is now essentially an asset manager.