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Recently we’ve been in discussion with the leaders of other major insurance companies here in the UK on the potential impact of the Retail Distribution Review (RDR) on their businesses.
We are convinced that the impact of the Retail Distribution Review will be the most damaging regulatory change to hit your business, fundamentally because UK new business volumes are set to collapse as a result of RDR implementation for the following reasons:
- UK new business volumes will decline by 15-20% through evaporating consumer demand and shrinking availability of advisors (IFAs and tied)
- Your margins will decline considerably as you are forced to make up for lost volume through marketing to difficult distribution channels, such as Aggregators and Price Comparison sites, at considerably reduced margins
- Your existing cost structure will be unsustainable given the decline in new business levels
Retail Distribution Review – Catalyst for huge shareholder value destruction
We have run a number of alternative scenarios through our ‘Monte Carlo’ simulation of the UK insurance market. In the ‘best possible’ outcomes (estimated probability 25-35% ) we see little impact on profitability and shareholder value of insurance businesses here in the UK.
However in our base case forecast (probability 35-55%) we predict that the overall impact on your business will be the destruction of 30-70% enterprise value. For those businesses with substantial debt this will mean virtually all their market value will be lost.
Our base case scenario predicts:
- Overall UK new business volumes will decline by 15-20%
- New business margins on policies written post RDR will decline by 35-40%
- Your new business volumes will decline by 20-25%
But it’s not going to happen?
The most obvious response is that it’s just not going to happen. Clearly industry feedback in an ideal world to the FSA will lead to the main requirements of the Retail Distribution Review to abolish commission payments to be watered down and implementation delayed to the distant future. But are these credible assumptions? A more realistic assumption is that the Retail Distribution Review is going to be implemented in more or less its current form in the UK.
Perhaps a more credible hope is that like water finding the sea, the current demand for financial advice and insurance product purchase will somehow remain unchanged and that these new business volumes will eventually find their way to Insurance manufacturers. I would counter that ‘hope is not a strategy’. Our view is based on:
- The average fully loaded cost to provide financial advice in the UK is £250 per hour
- The average UK consumer is only willing to pay up to £50 per hour for advice
- It will not be possible with the average UK consumer to close the £200 gap (between cost and willingness to pay) by charging fees based on the total portfolio asset value
- Many customers will purchase simplified products from their banks, use online ‘execution only’ services and ‘aggregators causing margins to collapse
- As a consequence, overall UK new business volumes will fall by 15-20%
Life after the Retail Distribution Review – What’s the way forward?
While the bulk of Insurance companies are tied up in the massive changes associated with delivering the requirements of Solvency II and the Retail Distribution Review, we believe a small number of companies will be able to take advantage of the new environment to transform their businesses to have a winning business model whilst others will struggle to survive.
To put it simply, to become one of the few winners in the post-RDR world you need to undergo a major business transformation to deliver a much lower cost business model by:
- Take radical measures to encourage consumer ‘execution-only‘ purchase exploiting the full potential of Web, Social Media and Mobile technologies
- You will need to develop a much low cost business model (cutting your operating costs by 20-30%) with that delivers a high volume direct-to-consumer capability at low-cost (exploiting Internet, mobile and new emerging distribution channels)
- Implementing radical changes in your business model, IT systems, product design and channel strategy to give you competitive advantage in the post-RDR environment
Who are we to offer you advice?
I should say at this point we’re a boutique, specialist firm focused exclusively on working with the leaders of service businesses to deliver successful business transformations. We have no ‘conflicts of interest’ in attempting to sell you on audit, mammoth technology projects or outsourcing.
You may wish to listen to some of our clients discuss how we helped them overcome their most difficult strategic challenges and emerge successfully. You can listen to and download personal interviews with:
- Andy Homer (CEO of AXA UK) on how we helped him turnaround losses of £100 million per annum to profitability and how he grew Towergate to be worth over £3 billion in 5 years at http://www.closequarter.co.uk/Interviews/AndyHomer.html
- Philip Rowley (as CEO of AOL Europe) on the turnaround losses of $600 million per annum to profitability at http://www.closequarter.co.uk/Interviews/PhilipRowley.html
- Joe Ripp on transforming Dendrite International a $450 million service business to double its value in a year (to $751 million) at http://www.closequarter.co.uk/Interviews/JoeRipp.html
Clearly at some point we would appreciate the opportunity of doing business with you. In the meantime can I suggest you download a copy of our white paper on ‘Why RDR will destroy most UK Insurance businesses and what you can do about it’ from http://www.closequarter.co.uk/RDR/ or simply email me to send you a copy.
Why not benefit from comparing our economic model to yours?
We have developed a ‘Monte Carlo’ simulation that sets out the shareholder destruction impact on you and your UK competitors. We would be delighted to share this model with you and your team.
If you are interested in a more in-depth discussion or have specific questions related to why we are convinced that RDR will destroy substantial shareholder value and what you can do about it then I will be delighted to provide you with more information. Our details are here on our CONTACT US page.