Showing posts with label Aviva. Show all posts
Showing posts with label Aviva. Show all posts

Wednesday, 17 December 2014

Life isn't all about migrating books

Why is it that acquisitions of Life & Pensions companies and books don’t realise the benefits that are stated at the time of the deal?

On the face of it bringing L&P companies and books together should be a sure fire way to make a lot of money from rationalising the systems, reducing the staff employed in back offices and closing head office functions.

However time over time the benefits realised are far less than expected. You only have to look at the TCS acquisition of the Pearl’s business in their Diligenta vehicle or the Resolution acquisition of Lloyds Banking Group’s closed book L&P business to see that these acquisitions are not simple.

Why is this and what can Aviva do to learn from the past to ensure that they are more successful than others, including Friends Provident, have been at maximising the benefits of bringing Life & Pensions books and IT together?

Pragmatism is key to realising the benefits

By taking an altogether more pragmatic approach than their predecessors and taking more pain early Aviva has the opportunity to gain far greater benefits in the longer term than previous integrators.

One of the principal reasons that previous deals have proved to be more difficult is that they have looked at the consolidation of the L&P books as an IT Programme rather than a business programme. They have tried to answer the question how do I bend my existing systems to cope with the new products that I want to migrate onto my platforms?

However the question that they should be asking is a commercial one and that is what is the case for migrating any of the books onto the target platforms?

Pensions are different from other products

The problem is specific to the closed book Life & Pensions industry.

There is a big difference between pensions and other types of products. Most products have a shelf life that can be measured in months or at best a few years. The life of a pension product is measured in decades, theoretically for as long as the last customer is still alive. To add to this there are also lots of different variations of products. The reason for this is that pensions products are designed by actuaries. Actuaries are incredibly smart people who love to create complex mathematics models to calculate when customers are likely to die and therefore how to ensure that a product makes a profit by paying out less than it takes in contributions. The character of actuaries has led to them designing pension products that are esoterically pleasing to them, incredibly difficult to understand for the average consumer and highly complex which has resulted in nothing such as a standard pension. The low boredom threshold that actuaries have has resulted in lots of different products rather than sticking to a product that worked for most customers. This means that any Life & Pensions company that has been around for even a few years will have a large number of pension products and often (particularly for products that were created many years ago and where most of the customers have subsequently died) low volumes of customers.

The reason that these products are highly profitable is because they were designed to be complicated so that no normal customer would be able to understand how the products work, particularly how the charges are calculated and how much of the pension contributions that the insurance company retains.

The result of this is that in order to maximise the benefits from integrating the Friend’s Provident books Aviva should classify the books into three groups.

Books need to treated in one of three ways

The first group is those books which are either too small and/or too different from Aviva’s existing systems and requiring too much manual work to support to justify migrations. For the customers of these books Aviva should consider buying them out of the products or offering to swap them into a modern product. While this will cost Aviva in the short term it will both save them in the longer term and potentially buy them goodwill from those migrated customers.

The second group is those books which are too different from Aviva’s existing books but still have sufficient volume and generate sufficient cash. These books they should resign themselves to keeping on the Friends Provident systems and find ways to reduce the cost of running those systems through renegotiating terms with outsourcers or looking at alternative ways of supporting those systems such as in the cloud or paying on a process as a service (PaaS) basis.

The third group is those books which are sufficiently similar to Aviva’s existing books that the changes to the existing platforms will be minimal and the benefits of migrating them onto the Aviva systems significantly outweighs the cost of the migration.

Can Aviva learn the lessons of the past?

Of course the reduction in platforms and the rationalisation of back offices and call centres are only two of the primary drivers of benefits for the integration of Aviva and Friends Provident. There is also the rationalisation of Head Office functions which should release further costs.

However the primary reason that Aviva wants to acquire Friends Provident is the reduction of capital that will be required as a result of all the cash that the closed books of Friends Provident throws off. This will not be realised unless Aviva learns the lessons from the past and takes a very pragmatic, commercial approach to the integration accepting the financial pain in the short term will be worth it in the long term.

Tuesday, 16 April 2013

RDR reducing access to advice for customers



The Retail Distribution Review (RDR) introduced by the UK Labour Government was aimed at improving the quality of advice provided to customers and the transparency around the charges for that advice.

With the annoucement first by Barclays in January 2011 and then by HSBC in May 2012 of their withdrawal from providing investment and Life & Pensions advice to the mass market, rather than help the customer, RDR has in fact reduced customer access to advice. Both banks have stated that the reason for their withdrawal has been that the business is no longer viable for them commercially. The additional cost of training their staff to meet the high standards laid down by RDR and, undoubtedly, the size of fines and the risks associated with mis-selling of these products, has made it unattractive for them to continue in this business.

RBS is neither fully exiting or getting behind branch-based mass market advice. Their announcement that they will be laying off 618 advice based staff is a reflection of the reality that if you move from what is perceived to be a free service (even though consumers are paying commission through the annual fees hidden in their investments) to one which is fee-based inevitably volumes will drop.

Lloyds Banking Group had been saying that they would continue to provide advice to mass market customers. However when they asked customers  about this what they  found "for the majority of our customers, demand for a fee-based financial planning advice service decreases when they have lower amounts to invest,". As a consequence they have announced that they will only be offering advice (for a fee) to those with more than £100,000 of investable assets. They will continue to offer a non-advised service through the Halifax, Bank of Scotland and Lloyds TSB branches. Around 1,000 branch staff will be impacted by this change and will be offered either a new role or redundancy. Given this move by Lloyds Banking Group the argument for selling off Scottish Widows becomes even stronger (see http://www.itsafinancialworld.net/2012/05/why-lloyds-shoudnt-dismiss-selling.html ).

Interestingly Santander is taking a contrary position and on hearing of the layoff of the HSBC staff allegedly approached HSBC with a view to hiring those laid off.

However even Santander is now reconsidering this position. In February 2013 they are being investigated for giving poor advice following mystery shopping by the FSA uncovering poor practices. Shortly before Christmas 800 advisers were suspended for retraining. A review of strategic options is now under way. In March 2013 this concluded with the withdrawal of face-to-face advice for new customers, putting at risk 874 jobs. A new team of 150 advisors will be deployed to serve existint customers.

In April 2013 Clydesdale, Yorkshire and Co-op announced the withdrawal of advice from their branches. In their case this was supplied by Axa. According to the Financial Times, Paul Evans, chief executive of Axa UK, said he was “very disappointed” that the division “must also now withdraw this service having not found a model which balanced the regulatory requirement that the service be profitable in its own right, whilst setting advice fees at an affordable level.”

The exit is not only being seen amongst the big players in the market. The building societies are also withdrawing from the market. In early 2011 Norwich  & Peterborough Building Society sold their sales force to Aviva and withdrew from the market. There are also large numbers of IFAs (Independent Financial Advisors) who due to the cost of funding the training and the amount of studying are withdrawing from the industry, again reducing accessability to advice for the lower to middle income customers.

This is creating a very serious problem. With all of us living for longer and the cost of living, particularly in the later years rising, with the reduction in employer provided pensions benefits, there is an increasing need for individuals to save for the longer term, to invest in individual pensions and to provide for their loved ones through life assurance. With the options complex and becoming more complex there is an increasing need for advice, however what RDR has done is reduce access to that advice.

With the availability of advice for investment products being reduced the current UK Government is now putting in plans to reduce the accessibility of advice for mortgage products. Similar to RDR the Mortgage Market Review (MMR) set out to protect customers but is fact making it far more difficult to get advice. For instance should a customer phone up a bank such as First Direct and ask about mortgage products the bank employee will not be able to talk about the difference between a fixed-rate mortgage versus a variable rate mortgage since that would be seen as advice and without completing a fact find that will no longer be possible. This could once again, see mortgage advisors and brokers withdrawing from the market.

Not all banks are withdrawing from either the investment market or the mortgage market. There are those who are considering the commercials and rather than quitting are looking at innovative ways of improving productivity of their advisors. Both Bank of America and Bank of Moscow have pilots out using videoconferencing to bring the advisors virtually to the branches. With the increasing acceptance of videoconferencing through the likes of Apple's Facetime or Skype, the availability on devices such as the iPad, then those organisations with the imagination may still be able to find ways to commercially provide advice to the mass market.

Of course videoconferencing does not overcome the requirement to have fully trained and qualified advisors, since selling through videcconferencing is no less regulated than through branches or contact centres. What it does mean though is that through the higher productivity brought about by the advisors being able to support multiple branches less advisors are needed and the cost of providing advice is therefore reduced.

What RDR shows, once again, is that when governments with all good intentions create regulation for the Financial Services sector the effect on customers is often the opposite of what they intended. Governments should spend more time considering and discussing regulation with customers and the industry (and not instantly assume that whatever the banks say is wrong and out of self-interest) and resist the temptation to rush out populist regulation.

Thursday, 22 November 2012

A Change of Strategy for Aviva?

The announcement of the appointment of Mark Wilson, the former CEO of the largest Insurance company (excluding China) in Asia, AIA, as CEO of Aviva from January 1st 2013 has been greeted positively by the industry. Mark Wilson, born in New Zealand, has spent most his career in South-East Asia both with AIA and AXA.

John McFarlane, the former CEO of ANZ Bank, will resume his role as Non-Executive Chairman. McFarlane spent most of his career with ANZ Bank and Standard Chartered Bank. At ANZ he set a strategy for the Melbourne-based bank of expanding into South-East Asia and it is today the Australian bank with the largest footprint in Asia. Standard Chartered whilst Head Officed in London has Asia as its biggest market.

Back in November 2010 Andrew Moss, the CEO of Aviva at that time, announced that Aviva was withdrawing from Asia to focus on the mature Western European markets (see http://www.itsafinancialworld.net/2010/11/aviva-to-exit-asia.html ), a move that was seen at the time very much as swimming against the tide as the likes of HSBC and Prudential were rapidly expanding there.

One has only to look at the difference in growth between the Prudential (once the target of a hostile takeover by Aviva, which the then Prudential CEO Mark Woods rapidly rejected) and the Aviva to see who had the better strategy.

The new CEO will inherit a clear strategy that John McFarlane in his time as Executive Chairman has laid out that is focused on the exiting of 16 non-performing business segments, including their US business. With challenges in their Spanish, French and Italian businesses and the increasing demand for capital from new regulation such as Solvency II, in the short term there is little opportunity for Aviva to reverse the exit and rapidly expand in Asia. There is an inherent danger that Aviva could end up following the restructuring, including the inevitable significant write down on exiting or disposing of their US business, becoming effectively a UK only insurance business at a time when the UK insurance sector is looking increasingly unattractive given the impact of RDR (the Retail Distribution Review legislation) and the slow growth in the economy.

However it is highly unlikely that an executive of Mark Wilson's calibre would have taken the role at Aviva to run a UK only business. With Wilson's track record of transforming AIA and the combined Asian experience that the Chairman and the Chief Executive have there is little doubt that they will both be looking East for the future growth of Aviva.

Tuesday, 1 February 2011

Will RDR see the end of advice in the bank branch?

With the recent announcement by Barclays of the withdrawal of investment advisors from their branches, coming on the back of (but unrelated according to Barclays) a record fine for misselling of investment products and the announcement that Norwich & Peterborough Building Society is transferring its in-branch IFAs to Aviva, where they will become restricted advisors, does the introduction of the Retail Distribution Review rules mean the end of the provision of advice in branches?

In principle no one can argue with the requirements of RDR that customers should expect to be given advice by qualified people who can either advise about the whole market of investment and insurance products or make it very clear that they can only advise on a restricted set of products from a restricted set of providers. Equally in principle no one can argue that if the advisors are providing value with their advice that the customer should pay for that advice and that the customer should be free of the concern that the advice is being influenced by the amount of commission that the advisor is being paid.

The challenge for the banks is that in order to get their staff up to the standards to pass the qualifications to be allowed to advise customers requires a significant investment in training and when compared with potential returns from the sales that they generate from the mass market in the existing business models for some banks, such as Barclays this looks financially unattractive. Hence why Barclays is moving to a model of pushing the mass market i.e. those with relatively low levels of investment, to online channels, whilst still providing face-to-face advise to customers who qualify for the Barclays Wealth proposition.

Of course this all depends on how you evaluate the business case. Certainly if the case is evaluated specifically on the cost of sale and the revenue generated as a standalone product sale, then it is difficult to make the case in a post-RDR world (post 2013), to provide in-branch advice to the mass market. However if the overall enhanced customer profitability of cross-selling customers insurance and investment products, many of which are seen as "sticky" products, and the impact on customer retention and customer advocacy is taken into account then the business case for advisors improves.

Another way to improve the business case is to improve the productivity of the advisors. Some of the ways this can be achieved range from simple measures such as more effective appointment management and more effective sharing of advisors across groups of branches to the provision of more effective technology enabled tools to the use of video-conferencing advisors into branches, reducing the time lost due to the advisors travelling to branches. As video-conferencing technology costs reduce and the technology improves (as with Cisco's TelePresence), the resistance of customers to video-conferencing will also drop.

Will other banks follow Barclays' lead and will the mass market be left without in branch advice in a post-RDR world? It is highly unlikely, particularly as banks such as Santander, HSBC, Lloyds Bank (with their 'For the journey' branding they would need to re-think their branding if they did) and RBSG (who have just announced the launch of the sale of two new funds) as they look to re-build trust and provide a differentiated service will follow that direction. RDR however does provide the banks with a significant catalyst to re-think how they provide advice to their customers.