This commonly held view is not without evidential support, but it hides more complex dynamics that are at play.
A number of forces, including those related to strategic and structural change in other markets and those which are particular to the offshore/international space, have exerted pressure on the recent evolution of that market and the product and service providers operating within it.
These can be examined under the following headings:
- regulatory change;
- strategic initiatives and re-evaluations;
- ‘new’ customer behaviours;
- adoption of technology; and
- capital attitude.
The bullet points above are not in any particular order but anyone involved in the financial services sector knows that over the last decade the volume of regulatory change, and consequently its share of management time and resource allocation, has been the dominant factor. Regulatory risk and its overall consideration has therefore risen towards the top of the ‘business critical’ list.
Put simply, there is a raft of legislative and regulatory change that has impacted on the way in which international life companies, asset managers and intermediaries operate.
These include large pan-European regulatory frameworks such as Solvency II (and its equivalent) for insurers, through to Mifid, Fatca and many more. There has also been a tightening and refocusing of regulatory frameworks in particular jurisdictions across the globe, such as Singapore.
These regulatory changes fundamentally alter how companies operate, the attractiveness of markets, the shape of products, the distribution avenues available and the capital required in the short, medium and long term to fund businesses.
Many companies that may have thrived in past decades are unable to exist in their previous format in the evolving regulatory landscape. Others, acknowledging a changed reality, adjust and refocus to ensure continued success (see box 1).
Example 1: SLI remodels
Standard Life International has adjusted its business model, withdrawing from fledgling distribution operations in Dubai and Singapore due in part to regulatory and structural market changes, which affected its opportunities. Focusing on its more mature and valuable UK market activity, SLI should see a reduced requirement for capital as the business moves towards a capital generative position.
Initiatives and re-evaluations
In recent years, financial services groups, including banks and insurance companies, have overwhelmingly pursued a strategy of focusing on core competencies.
In part driven by regulatory pressures, the old mantra of targeting growth across the ‘waterfront’, both within sectors in terms of product range or in terms of multi-sectors (insurers establishing or owning banks and banks establishing or owning insurers, for example), has now fallen away.
Instead, they have reviewed their core business purpose and re-established what they do well and at scale. Completeness across products or markets has been reclassified from a strength to a dangerous vanity.
The ‘dangerous’ moniker is key here. Businesses that existed for completeness or some other strategic aspiration but which had never assumed sufficient scale or garnered the attention or justifiable rationale, present risk. This risk comes from not being part of a logical, articulable story in a de-risked and generally risk-averse world since 2008/9.
Example 2: Royal london changes tack
A good example of this change has been the development of RL360°.
In 2013, Royal London entered into an agreement with funds advised by independent private equity firm Vitruvian Partners to support a management-led buyout of RL360° Insurance Company and its subsidiaries. This followed a change in focus and market appetite by the UK mutual parent.
Royal London 360° was rebranded as RL360° following the transaction, with senior management remaining in place and co-investing alongside the private equity fund.
In November 2015, the RL360° Group acquired the closed offshore life company CMI Insurance Company from Lloyds Banking Group, adding around £4bn in funds under management and significant synergies. This former CMI/Scottish Widows International company also exemplifies the change in strategy and risk appetite of a parent.
Initially closing what was one of the larger and early established international life companies, and then disposing of it, the parent banking group’s actions illustrate the change in strategic direction at play in much of the market over recent years.