Why insurance isn’t always right.


This is an article in preparation for publication; thoughts on it, especially from insurers would be very welcome.

In it, I argue that insured solutions are not always right for us – in our retirement savings and that insurance companies should recognise that CDC represents a valid alternative to their solutions.

No doubt – in time – insurance companies will adapt to a changing market, but for now , an acceptance that CDC has merit and is here to stay, defines the ambition of this piece!


Insurance companies rightly market their wares as a means of getting certainty. There are many people who need certainty.

People with a low appetite for nasty outcomes chose insured products that give guaranteed outcomes. The guarantees that we get in this country are as good as they get. Even the Equitable Life is alive and kicking and owned by a bank (Lloyds).

We have in the FCA and PRA, two of the most sophisticated and experienced regulators in the world. The proof of that statement is in the pudding. We still believe in insurance in this country.

But insurance has its limits

Anyone who has been racing, knows that betting on every horse in the race generally loses money, that’s because bookies run books that are designed to make them money most of the time, it is the bookies margin.

The same goes for insurers, they provide certainty at a cost, and usually efficiently.

But recently (and I mean by that – the past fourty years) insurance companies have been looking to compete with asset managers for the lucrative savings market, where guarantees are few and returns are high. The margins of the asset managers are among the highest of any sector in financial services, let alone the UK stock market!

The trend towards the low-guaranteed insured savings market, can properly be traced to Mark Weinberg, a South African actuary who came to Britain and set up unit linked life insurance. Abbey and Hambro Life were the first companies to compete with traditional insurers and they danced rings round them with the agility we nowadays call disruptive technologies.

It’s taken forty years for the rest of the industry to catch up, but now we see Aviva, Royal London, Standard Life and Zurich as leading providers of insured platforms that compete for the nations wealth (both in and outside the workplace). “Insurance” in the classic sense of the word, continues, but most of the risk is laid off to reinsurers. The remaining primary life insurers in this country are providing services to occupational pension schemes keen to buy out guarantees they have taken on accidentally over the years.

A potted history – but relevant

The reason for putting these thoughts to paper is to make sense of the opposition that the insurance industry has to Collective DC pension plans

By “collective”, I mean plans that allow large groups of people to provide insurance between themselves against unfathomably difficult problems like the chance of them living too long, or the risk of a market crash catching their savings at a vulnerable moment or of someone making off with their assets.

By creating a collective, a pension plan as big as the Royal Mail’s is creating a club of 142,000 people who effectively insure each other, without the need of an insurance company.

Ironically, this is how most insurers in this country started. But it is not how they have grown. Insurance companies have shed this club-ability and become PLCs, they have turned to the banking system for capital and have created vast reserves – known as solvency margins. The margins are governed by European solvency standards and -because the money that backs up insurance is providing the certainty of guarantees, it is relatively unproductive. The solvency costs of an insurer are, other than the insurers overheads and margin, the primary cost of the guarantees they provide.

In a CDC plan, there needs be no great solvency margin, the enterprise of providing pensions from a club of members can rely on the scale of the club and liquidity caused by the constant influx of new members, the payment of dividends , fixed interest payments and rents from the assets within the collective pot.

The insurers are now complaining that this puts them at a competitive disadvantage. They, forget when they say this, that this is the advantage that they collectively gave up. They gave it up when they moved to the unit linked insurance model pioneered by Mark Weinberg and they gave it up when they converted from mutual to PLCs to benefit from the power of world capital markets.

These big decisions made by insurers mean that they will struggle to pay pensions competitively. You only have to look at the cost of buying-out an occupational DB plan relative to running the liabilities off over time, to see that the insurance company guarantees are expensive. Ordinary people see the same thing when applying for an open market annuity quotation. The cost of buy-out through annuities is less in the bulk market, because the insurers are getting economies of scale, but they cannot shed the cost of their solvency reserves.

Why the occupational market is split

The defined benefit schemes left in this country are split between those heading for buy-out (rightly seen as a safe haven), those intending to pay pensions till the last person standing and those so weak -that they  will fall in time into the Pension Protection Fund.

This is a varied market which offers a number of sub-options (partial buy-out) consolidation between schemes and various types of buy-in. Insurance companies are involved with most of these sub-options, providing valuable guarantees when needed.

But there is a small but distinct part of the occupational DB market which does not want insurance guarantees, preferring to rely on the club-ability of membership providing mutually insured benefits.

Where CDC fits.

While the DB market has developed into these various strands, the DC market in this country has hardly developed at all. Since the demise of with-profits, most ongoing savings has been into unit linked products with no intrinsic guarantee but the option to guarantee the pension through the annuity. The annuity model was the default for DC savers until April 2015.

This model was rejected by George Osborne when he introduced pension freedoms and we have been waiting for a new default to arrive ever since.

Progress towards a collective model was arrested soon after it was given birth when a new Government put the development of CDC plans on hold (mothballing the Defined Ambition secondary regulations necessary for CDC to come into force).

But the demand for a collective DC pension did not disappear, it just simmered. It erupted in 2017 when Royal Mail agreed to adopt CDC for its members.

Insurers are now worried that the Royal Mail scheme will be seen as providing ordinary people with the kind of pension they had been wanting from their savings. They are particularly worries because they have modelled a retirement savings landscape in which they can be the dominant player. The now well established unit linked model, in conjunction with their well capitalised annuity capability, gives them hegemony over all stages of the workplace and non-workplace savings market.

CDC presents a threat, not to their market dominance, but to their almost total market dominance.

CDC is (in practice) – a small threat to insurance companies.

There is no doubt that most people will use insurance companies for some part of their retirement savings. CDC offers little advantage over DC (and some disadvantages in terms of personal ownership) – at least when we are building up our pension pots. The concept of pooled funds into which we invest our money, is already a form of collective.

Insurance companies, through their good strategy, now own or partially own most of the DC accumulation going on in this country, especially in the workplace.

However, insurance companies are badly placed to compete for the decumulation of our pension pots, as it currently stands. They are no longer the nimble beasts of the early days of unit linking and they are not the behemoths who could use their mutual status to manage liabilities through their with-profit funds. They are wedded to an individual drawdown model built around “platforms”.

It is this part of their business, that CDC threatens. The platforms on which our wealth sit, are planned as a means to run off mass market assets for ordinary people who would not think of themselves as wealthy. This is the market that the FCA has concerned itself with (both in its Financial Advice Market Review and its Retirement Outcomes project.

This is a largely prospective market for insurers, it is the market that was catered for by annuities and the hope is that robo-advice will enable drawdown to flourish in place of an advisory community that has largely disbanded (or moved into the genuine wealth market).

Because it is prospective, the insurer’s market participation is speculative. This is why very few insurers have got overly animated by the prospect of CDC plans. If , as I argue in this article, CDC only becomes popular as a mass-market means of getting a pension, then the insurers have little to worry about. I see the prospect of CDC cannibalising the wealth propositions of the platforms, as dim.

For this reason, the argument from insurers that CDC unfairly competes (as it has no need to reserve) should fall upon deaf ears. CDC is a means of collective insurance and the risk falls to those in the collective. Other forms of DC may have higher costs (associated with insurance) but provide value adds in terms of guarantees.

The co-existence of two models, collective and individual in the workplace and non-workplace pension markets, is something devoutly to be hoped for. Insurance companies should welcome the competition from CDC and adapt to it.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Why insurance isn’t always right.

  1. John Mather says:

    It seems that you are reinventing a mutual.

    That’s where a collective is run for the benefit of the staff and advisers whereas a proprietary is for the benefit of the shareholders.

    I suppose once all those responsible for the demise of DB will need employment somewhere else

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