The Future

We are seeing a real polarisation amongst life offices with the strong getting stronger. The practical impact is that, despite strict new solvency rules from the FSA, strong life offices can maintain and even grow equity proportions in the long term. All previous logic states that in the medium to long term equities will out perform other asset classes and so the higher the equity content the stronger the long term prospects.

As you have seen, the target life offices are showing strong increases in their reserves and as well as giving a valuable insulation in poor years this is another contributory factor to high equity ratios.

A key point about the increases in reserves is that these are policyholder reserves and logic and regulation dictate that these gains will be passed on to policyholders as the accrued value from the last few years is gradually released through increased bonus payments.

Finally the funds themselves are becoming increasingly efficient with most life offices moving over to a variable cost basis for their administration. Within the last few months Prudential have announced an outsourcing arrangement with Capita and Norwich Union with Swiss Re. These developments will bring significant cost savings which in turn will help fund performance.

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