Our thanks go to the firms which took part for kindly sharing their time and their insights. We hope you find the report useful and look forward to discussing the featured themes with you.
The output from this survey is relevant for everyone focused on the strategy and value of running with-profits businesses.
If you have any questions regarding this survey please contact one of our team.
Hot topics
Reviewing and changing investment strategy continues to be the most common area of focus for with-profits business with the impact from the market environment being a key focus for funds, specifically in relation to the high interest rate and high inflation environment. As part of our findings around investment strategy, we have observed that:
- There has been a move out of government bonds, and towards property and equity investments. This is likely to be due to an appetite to protect real returns in times of high inflation.
- Where funds are invested in equities, there is a wide range in the proportion invested in UK equities, suggesting that some funds may benefit from further diversification.
- It is common for funds to use hedging as a tool in managing the risks within their fund(s). Whilst interest rate hedging is still commonly being used for GAOs, there has been a reduction in interest rate hedging when compared to the 2021 survey results - indicating that firms were hedging against lower interest rates where guarantees are more onerous. Further, the extent of currency risk hedging has increased significantly since the 2021 survey, which may be driven by an increase in exposure to overseas investments.
What is your approach for keeping your investment strategy relevant for your fund(s) given the macroeconomic environment, and in light of changing industry focus?
Consumer duty and fair value
The FCA’s Consumer Duty requires firms to take reasonable steps to achieve good outcomes for consumers.
The requirements came into force on 31 July 2023 for new and existing products. Firms must comply with the requirements for closed books by 31 July 2024. It is clear this has been a focus for with-profits management and will continue to be as the 2024 deadline approaches for closed books. In fact, it seems the closed book deadline is potentially more impactful for many firms with with-profits funds than the deadline which has just passed.
As part of our findings, we have observed that:
- Firms are at varying stages of maturity with their approach to consumer duty. This is most likely because of the mix of open and closed products in with-profits books driving the timelines firms are working towards.
- There are a range of approaches across firms. This is to be expected but firms should consider whether there are aspects of their approach that need enhancing, taking into account FCA expectations and the market directions. For example, with respect to the metrics being considered for fair value or the approach to communications testing.
- With-profits does not operate in a vacuum to the rest of the business when it comes to consumer duty. It is right that a firm wide approach should be taken. However, where there are with-profits specific challenges or potential drivers of harm these need to be factored in. Some firms are considering this within fair value assessments and should consider whether there are also specific challenges with customer understanding or support.
When implementing Consumer Duty what are your specific considerations for with-profits business e.g. customer understanding of with-profits products?
Reserving for goneaways
The issue of goneaways continues to be an area of focus for with-profits funds, with some firms making an allowance for goneaway policies who are not expected to claim from both a reserving and capital perspective. Of the funds that make an adjustment for this in Best Estimate Liabilities, the most common approach is to apply an experience analysis type methodology on expected claims, though making an adjustment based on a range of factors (age, policy type, premium status, maturity date) is also used. Interestingly we noted very few companies making an allowance for goneaway policies in capital calculations, suggesting this is not a material factor in capital management.
How do you measure the materiality of your goneaway policies, both now and how do you expect this to change over time?
Payouts and charges
Finally, we have again sought to compare charges, expenses and payouts. The former being particularly relevant given that cost management continues to be a key focus for with-profits business, with streamlining existing processes and reducing costs of managing with-profits business being common areas of focus for with-profits business. Our key observations from this are:
- We have generally observed that charges and expenses have decreased, both on a monetary and percentage measure. The key exception being for UWP bonds where the average monetary charge has increased significantly.
- A wide spread of both expenses and charges, which shows that as per our 2021 survey that expenses/charges are on average larger for UWP products than CWP, both in monetary and percentage terms.
- We have not observed any patterns in the change in average payouts since 2021, albeit it should be noted that the data supporting this becomes more volatile over time as policies run off.
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