Consumer Targeting in Life and Pensions

Table of Contents

OVERVIEW

• Catalyst
• Summary

EXECUTIVE SUMMARY

• Executive Summary

CONSUMERS LACK EDUCATION ABOUT THE IMPORTANCE OF LONG-TERM SAVING

• Key takeouts and implications
• Trend: Consumers do not take responsibility for their own future
  • Personal debt levels have been increasing due to a credit-dominated society
  • Young people have embraced credit as a way of life and are most in debt
  • Consumers have a short-term outlook when making saving and investment decisions
  • Consumers are sacrificing savings to clear their debts during the financial crisis
• Trend: Market volatility and poor performance makes savings an unattractive option
  • Declining interest rates have offset the desire to save in deposit accounts
  • Poorly performing housing markets have created new uncertainty and consumer caution
  • Consumer confidence in financial institutions have plummeted during the financial crisis
• Insight: Consumers' confusion makes their need for financial planning greater than ever
  • Consumers are uncertain and confused towards financial planning, acting as an implicit barriers to savings
  • Insight: Financial establishments have evolved to meet the needs of the old but are failing to engage the young
  • Consumers have been priced out of the savings market and unable to afford advice
  • Traditional advice channels have become an outdated model as consumers seek advice online and from family and friends
• Insight: Attempts by the government and industry to educate consumers about their finances have been unstructured
  • The FSA has attempted to make consumers understand financial products easier with online tools
  • The Retail Distribution Review aims to increase consumer access to and confidence in financial services
  • The Money Guidance service is well placed to fit into existing advice services to offer guidance on money matters

TARGETING OF EXISTING CUSTOMERS IS AN IMPORTANT STRATEGY FOR PROVIDERS

• Key takeouts and implications
• Trend: The economic downturn is encouraging consumers to switch providers
  • Customers are sacrificing policies as lack of affordability becomes an issue during the financial crisis
  • Customers lack confidence in poorly performing equity-based products
• Trend: Technology is helping consumers in their search for transparent and competitive policies
  • Consumers are becoming tech-savvy at managing their finances
  • New entrants with strong brands and consumer access are intensifying competition
• Insight: Existing customers can be placed in four key groups, and understanding their motivations for defection is vital for a retention strategy
  • Budget customers are motivated to defect by a change in circumstances
  • ' Lost' customers are motivated into defection by some failing of the provider
  • ' Stolen' customers are attracted away by an offer launched by a rival provider
  • ' Bought' customers switches providers on the basis of price
• Insight: Retention efforts should be focused on customers with high lifetime profitability
  • Highlighting the most profitable customers can improve retention and efficiency
  • Providers can segment existing customers into four key groups
  • ' High maintenance' or ' value creator' customers come with high lifetime profitability and should be targeted by providers

DEMOGRAPHIC TRENDS ARE MAKING PENSION SAVINGS A NECESSITY

• Key takeouts and implications
• Trend: An ageing workforce will put pressure on people to support retirees
• Trend: People need to save for their retirement but they are hindered by the perception of affordability
  • People are not prepared to take on higher pension savings during a market downturn
  • Affordability combined with short-term views act as further barriers to pension savings
  • People are not saving for the future, assuming that they will be looked after by the buckling state system
  • Young people are discounting the value of importance in building up retirement savings
• Insight: Government reforms will not do enough to help individuals save for retirement
  • It is hoped that personal accounts will address the problem of long-term retirement savings
  • The state pension age is set to increase for men and women from 65 to 68 by 2046
• Insight: Providers are not targeting those approaching retirement who want to secure their retirement ambitions
  • Accumulators are aged between 50 and 59 years, but have lifestage complexity
  • Accumulators want their individual needs recognized with a personal service
  • Accumulators are also attracted to convenience
  • Innovative example: Lincoln Financial Group has highlighted individual needs of consumers when thinking about retirement planning
• Insight: Providers are not targeting those with aspirations of accumulating wealth
  • The financial services industry is missing the opportunity to harness the aspirer market
  • Banks are targeting aspirers in other market areas but are failing to offer long-term products
  • Connecting to the world and having a sense of belonging appeals to aspirers
  • Aspirers are increasingly seeking a purchasing experience that is efficient and convenient

A SIGNIFICANT PROTECTION GAP REMAINS IN THE UK

• Key takeouts and implications
• Trend: Consumers have under provision of protection
  • Consumers believe they do not need protection
  • Consumers are sacrificing adequate financial protection with rising personal debt
  • Consumers are over estimating life insurance costs
• Trend: Consumers take out protection policies after ' trigger' events
  • Trigger events are moments in people' s lives that can induce significant changes in protection behavior
• Insight: Providers are not impressing consumers enough about the need for protection
  • Providers need to focus on customers rather than price
  • Advisors have a chance to change the perception of the protection insurance
  • The protection gap still persists at £2.3 trillion in the UK
  • Innovative example: PruHealth rewards customers who make an effort to lead healthier lifestyles
• Insight: Providers are not targeting individuals who have been affected by life events
  • Milestoners feel that trigger events make them stand apart from the crowd
  • Milestoners want to be recognized in their new roles and new needs
  • Milestoners need reassurance and security after a life event

LIFE-BASED INVESTMENTS FAIL TO ENGAGE CONSUMERS

• Key takeouts and implications
• Trend: Consumers are risk-averse and shunning equity-based investments
  • Consumers are risk-averse and prefer safer or guaranteed returns
  • Consumers lack confidence in equity-based products and are seeking safe haven in cash accounts
• Insight: Economic turmoil is the most challenging issue faced by the investment bond market
• Insight: Investment bonds need to attract to the cautious and less affluent consumer

ACTION POINTS

• Action: Education and improved communication strategies will help providers engage with consumers
  • Consumers need effective and regular communication
• Action: Relationships with existing customers must be deepened to retain business
  • Providers should improve customer service and address pricing strategies to retain the budget customer segment
  • Providers must improve affiliation with ' lost' customers to retain this segment
  • Communicating product and service advantages is needed to retain ' stolen' customers
  • Providers must make sure that prices remain competitive to keep the ' bought' customer segment
  • Providers need to move their existing customer base towards the ' Value Creator' status
  • Cross-selling strategies must offer value to the customer and not simply convenience
  • Life and pensions companies must take action to build relationships with online aggregator sites and build online communities with consumers
• Action: Providers must aid consumers in exercising responsibility for retirement planning
  • The government and industry must put more personal responsibility on consumers about retirement planning
  • Providers should reward ' accumulators' to incentivize this segment to save
  • Providers should establish early relationships with ' aspirers' to gain business when they accumulate wealth
• Action: Providers need to impress upon consumers the need for protection
• Action: Providers need to innovate life-based investments to suit the risk-profile of today' s consumers
• Product development must focus on flexibility

APPENDIX

• Data
• Definitions
  • Life-based savings products
  • Life assurance
  • Term assurance
  • Income protection
  • Critical illness
  • Collective life
  • ISAs
  • Personal pensions
  • Stakeholder pensions
  • Group personal pensions (GPPs)
  • SIPPs (Self Invested Personal Pensions)
• ABI definitions of distribution channels
  • Independent financial advisors (IFAs)
  • Direct sales forces
  • Tied agents
  • Multi-tied agents
  • Bancassurance
  • Direct marketing
  • Telesales
  • Other
• Further reading
• Ask the analyst
• Datamonitor consulting
• Disclaimer

TABLES

• Table: Changes in population segments between 1981 and 2007 (' 000s)
• Table: Projected life expectancies at State Pension Age (SPA) of 65, by sex, 1981 - 2051

FIGURES

• Figure: Consumer credit gross lending in the UK market has continued to fall in 2007 whereas balances outstanding have continued to grow steadily
• Figure: The value of savings is of great concern to consumers
• Figure: UK house prices are sharply down
• Figure: Consumers are utilizing informal sources to obtain financial advice
• Figure: The FSA' s ' Moneymadeclear' website aims to simplify financial products and services
• Figure: The FSA' s ' What about money?' website aims to get 16 - 24 years old financially capable
• Figure: NatWest' s MoneySense program aims to increase the bank' s provision of practical financial guidance
• Figure: People are considering contributing less or stopping contributions into a pension during the financial crisis
• Figure: Transparency of product features and price are important to a consumers' choice of insurer
• Figure: Online price comparison sites and banks are the most trusted financial institutions
• Figure: The internet has become a key source of advice to consumers
• Figure: Most IFAs perceive the term assurance market to see increased sales through aggregator sites
• Figure: The lifetime valuation of the customer will affect the strategy approach
• Figure: Pressure on the working age population is increasing as more people begin to retire
• Figure: Longer life expectancies are producing a growth in the number of older people in the UK
• Figure: Affordability is a strong barrier against saving for a pension
• Figure: The accumulators are a significant part of the population in the UK
• Figure: Lincoln Financial Group offers a gentle reminder to consumers of the future challenges they may face in their lifetime
• Figure: Consumers perceive protection insurance as either unnecessary or unaffordable
• Figure: Customers take out term assurance once they have had their first child
• Figure: PruHealth makes health insurance more tangible by rewarding customers who lead healthier lives