Insurers' biggest battle

THE BOSSES of Britain's biggest insurance companies are crossing their fingers. The Government will soon decide how much they will be able to charge for a new raft of stakeholder savings products aimed at encouraging low-earners to stop splashing out on the High Street and put something aside for the future.

After months of wrangling over the outcome of the Sandler review, there is a growing feeling in the City that insurers may get their way and the proposed flat 1% cap on fees they argue would make writing such new business pointless may be modified to allow them to charge more.

Victory would wrap up what has been an encouraging end to the year. The third-quarter new-business reporting season left Friends Provident crowing about its prospects and saw even the cautious Prudential conceding the hangover caused by the worst bear market in a generation may finally be clearing.

But the fractious two-hour Treasury Select Committee hearing into the health of the long-term savings market a fortnight ago gave a stark reminder that the biggest battle has yet to be won - regaining the public's trust.

MPs gave Association of British Insurers director-general Mary Francis a grilling as they blasted the life companies' 'complacency' in the face of the spiralling mortgage endowment crisis and 'reckless incompetence' in keeping so high a position in equities when the tech bubble burst.

Angela Eagle, Labour MP for Wallasey, tore into Francis over the life sector's mis-selling of products and the high commissions paid to independent financial advisers. 'Misrepresentation of products and bribery of distribution channels - that's the insurance industry in a nutshell,' she said. The words of Richard Harvey, chief executive of Norwich Union group Aviva, a week before the hearing were almost prophetic. 'We are seeing the green shoots of recovery, that people think equity markets have turned,' he said. 'But the thing that really matters is the restoration of customer confidence.'

ABI research shows that nearly four in 10 pension customers distrust the life insurers they are handing their hard-earned money to. Industry executives concede a seemingly endless amount of bonus cuts and mis-selling cases has severely hit the companies' standing.

Whether much more could have been done to weather the storm is open to debate. Sharp share price falls put an almighty squeeze on life firms' withprofit funds, slashed companies' solvency margins and pushed Equitable Life to the brink.

Billions of pounds of shares were dumped on the market and, as the dust cleared, the carnage was there for all to see. Big-name with-profit funds at AMP, Swiss Life and Britannic shut to new business. The industry's own figures show that of 62 life companies operating in the UK, only 22 remain open.

Companies see Sandler as the first battleground in the struggle to bring more customers back. Francis McGee, the ABI's head of regulation and strategy, argues that if the Government gets Sandler wrong, hardly any dent at all will be made to the UK's estimated £27bn savings gap. He points out that a 1% cap was used on stakeholder pension products when they were launched two years ago. More than 80% of the schemes are now 'empty boxes' with no contributions being made into them at all.

McGee argues that the 1% cap or margin means firms will not be able to provide the necessary advice to customers or give enough of a marketing push to the products.

Analysts agree insurers would be happy for an annual premium of around 5% to be introduced alongside the 1% cap. One said: 'A flat 1% cap is just not going to happen. It doesn't make any sense at all.'

Championing industry initiatives such as the ABI's own Raising the Standards, a quality mark scheme launched three years ago, may also help. Simon Douglas, managing director of marketing at Standard Life, says: 'The very fact that there is so much focus and attention on people to save more means there are good fundamentals for the savings industry. We just have to make sure we put across as compelling a case to do so as we can.'

Top five who are set to hold sway

THERE is a gap between the haves and have-nots in the life insurance sector. Those with the financial muscle to withstand the worst of the downturn can up their exposure to equities and write more business, and are gradually pulling away from those whose aim has simply been to survive. Analysts believe as few as five firms will dominate over the coming years. The current top five are Aviva, Standard Life, HBOS, Legal & General and Prudential. Aviva chief Richard Harvey says: 'As confidence returns, it may become possible for smaller players to recover but there will be a consolidation of where new business goes.'