Nothing inevitable about the decline of with profits #insurance

Here is the headline from a piece in the February 2017 edition of The Actuary magazine:

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I’m not so sure about the ‘terminal decline’ status of with-profits funds. In fact, I’d go further: I expect to see a resurgence in with-profits business within financial services over the medium term. The challenge will be finding enough actuarial resources to manage it.

With-profits is a useful label for the actuarial profession. It immediately conveys the fundamental nature of the business in question. It infers an estate, discretionary bonus distributions, policyholders’ reasonable expectations, risk management, capital adequacy and so forth. While very few new with profits insurance policies are being written now, there is an obviously similar financial asset that the community has embraced, both by direct investment and indirect investment in a superannuation fund: listed equity.

An investment in a listed equity stock brings with it many in-principle similarities to the traditional with profits life insurance policy. Firstly, the extent of the dividend (cf bonus) will depend on the performance of the Company (cf fund).  Secondly, the setting of dividend (cf bonus) policy is discretionary and up to the Company management to determine. Thirdly, there are no guarantees: the shareholders (policyholders) rely on the directors and executive to manage risks prudently but in the event of a failed Company (cf insurer) liquidation or restructuring will be required. There are established mechanisms under law as to the ranking of stakeholders in a wind up or restructure.  Yes, I know, there are also substantial differences but I argue they do not change the fundamental comparison.

Why should the community embrace equity investment yet spurn with-profits insurance and pensions? There must be something in the detail of the with-profits insurance rather than the concept that has turned people away. Yet with-profits offers access to capital not readily available otherwise. The issue is therefore related to the willingness to pay for the cost of capital. As soon as that can be offered as a financial services product in such a way as to attract new customers the flood gates will open. Many institutions are working on this right now – don’t be surprised when it takes off.