Is protection insurer consolidation a step backwards or a harbinger of opportunity?

Last month, Royal London agreed to acquire Aegon UK's individual protection book of business, including the life insurance, critical illness and income protection policies for over 400,000 customers.

Aegon marks the second provider to leave the individual protection market in the past year, following Canada Life's exit from the individual protection space in November, and advisers recently expressed concerns about ongoing consolidation leading to reduced competition.

In the short-term, further market consolidation can create "anxious moments", according to Roy McLoughlin, speaking on behalf the Protection Distributors Group (PDG), as advisers will worry whether the insurer they are recommending will still be here in a few years' time.

McLoughlin notes there might be a resulting fear of innovation in the market as consolidation can lead to a lack of competition among providers, whereas the industry needs to "expand, innovate and look at new solutions and new ways to write business" to prevent this from happening.

"That's more likely to happen when you have more competition," he explains. "If you're an insurer with restricted competition, there is a fear that you might not be as eager to innovate because you are not keeping up with as many companies."

Richard Kateley, former head of intermediary development at Legal & General (L&G), highlighted that another provider exiting gives others the chance to "charge a bit more and pay a bit less."

"I don't think we will see less protection being sold, but I question whether it's going to be the best protection that's out in the marketplace," he says.

"The problem with providers leaving the market is a loss of specialisation, because a lot of the ones leaving are not mass-market providers - they're the ones that specialise in niches and really drive the market in that single product," he detailed, whereas "the likes of Aviva and L&G try to be everything to all people."

Matt Chapman, commercial director at Plus Financial Group, said the most upsetting aspect of Aegon leaving the independent protection space is seeing another provider that offers executive income protection (IP) pulling out of the market "because it's limited enough and now we've got two or maybe three options at a push."

He states that the executive IP space is a "great growth opportunity" for the industry and it needs more competition: "If this acquisition enables Royal London to potentially package an executive IP contract under their banner, that can be a real positive for the market."

By the same token, Setul Mehta, head of partnership services at The Openwork Partnership, says that executive IP is the area of the market most in need of more choice, compared to life and critical illness, and consolidation may mean "more innovation and other players wanting to operate in that space."

Impact on intermediaries

A reduction of insurers operating in the market will also affect the intermediary community, particularly those that have developed strong working relationships over the years or those that specialise in particular products or consumer groups.

However, a smaller, more concentrated marketplace can help advisers to focus their guidance as the marketplace is easier to research and understand, Kateley comments, so "in one way, it really does help to have a slightly less populated market, while a reduction in market complexity may also encourage growth in the number of advisers selling protection, he adds.

Zanele Sibanda, head of internal markets at Towergate Health & Protection, notes that consolidation gives advisers a "more focused range from which to make a recommendation," meaning advisers can "better understand what's in front of them and explain the value or the outcomes to customers," thus meeting Consumer Duty requirements.

"This will be a good outcome for consumers in the sense that products will be the right price and the right value, and we will be able to give better advice," she says.

McLoughlin added that on the back of market consolidation, Consumer Duty creates not only an opportunity, but a "rightful correction of generalist independent financial advisers who will now have to look at protection as an underpin of all financial advice."

"That means that our wealth cousins, our mortgage cousins and our group cousins will need to start looking at protection far more under the Consumer duty requirements, so that should expand the protection market."

A step backwards?

Alongside fears of reduced innovation, protection participants expressed concerns that a lack of choice following further provider consolidation will impact not only the price of premiums but also customer perceptions on the value of seeing a broker.

Overall, consolidating the market too much means product options don't "seem particularly different for customers," Chapman explains, and it "limits the choice available to brokers and makes it harder to find the right solutions" for customers.

"Further consolidation in the long run could diminish the value of seeing a broker when your choice is so limited. It starts creating opportunities for customers to go online and do it themselves," Chapman details. "Consumers won't see any major significant difference between shopping online and seeing a broker."

Ultimately, Sibanda describes further market consolidation as an "unsustainable" trend: "The market has shrunk to a point now where any further shrinkage could possibly create a cartel-style industry where you have very few players with very little to choose from.

"Therefore, the players that remain are the ones that are determining the price and leaving consumers with little to no choice because that is the only thing that's available," she says.

However, regarding Aegon's departure in particular, Chapman doubts that many networks and firms will feel much of an impact as they operate within restricted panels. Aegon is predominantly used by brokers that "really understand their proposition", which he says may be another driver as to why Aegon left the individual protection market.

Similarly, Mehta commented: "I am absolutely not envisaging a reduction in protection sales as a result of Aegon leaving, or less choice in the marketplace. Advisers will just have to learn other propositions, and there are other propositions out there," which he believes will reduce complexities.

He asserts there are more new players joining the industry than there are those exiting, resulting in what he calls a "pretty crowded" market and, therefore, the industry "isn't going to be worse off."

Potential deterrent

Aegon's departure from the individual protection market has highlighted that niche aspects of the industry are currently underserved, and new entrants would be welcomed to cater to these respective areas and kickstart further innovation.

"What we are lacking quite distinctly in this industry is disruptors in the market, who will come in with fresh ideas and do things differently," Sibanda comments.

"Most of what we think is innovation, or what we think is product development, is either a rehash of something that has always been there, or just a small improvement on something provided by another insurer."

As such, new entrants might find a smaller market easier to understand in terms of where gaps and opportunities exist, she adds.

However, Chapman explains that if a business perceives further market consolidation in protection to be caused by a lack of profit or an unviable business model, potential entrants may be deterred.

"Simultaneously, if they've left to focus on other business interests that make more viable sense, that might become an attractive proposition, because someone might see an opportunity to enter and innovate a product to fill the void that has been created by Aegon's departure," he explains.

Meanwhile, Kateley says that if companies are seen to be leaving the market, "the likelihood is people will question it," which could create a barrier to entry.

"If you're going to come into the market now, you'd have to come in as a niche provider and develop something that's really good on one of the product ranges, rather than trying to take on the Aviva's or the L&G's of this world," he points out, adding that the next market entrant is not likely to take on a traditional insurer operating model.

"The next entrant that comes into the market that will really be a disturber is somebody like Amazon or Google, or an IT company - it won't be a provider that we're expecting. It will be trying to serve the market in a totally different way," he comments.

Mehta concludes that if a company has the right sustainable business model, the right funding and backers, and the right vision, they can certainly enter the industry: "There's innovation to be had within the protection space. We just have to find the right people with the right mindset to be able to bring that innovation to life."