Mergers and acquisitions can bring costs down in the long run for the consolidating business, with reduced staff and integration of systems, processes and technology.
Lakey says: “With life insurance, there's been an increasing trend to cut premiums. And this is partly due to the fact that there's pressure from the regulator to offer cheap products, but also [as a result of the influence of price comparison sites].”
So without scale or a good enough market share, it can be tough for an insurer to operate in the market.
Another factor driving consolidation is where a company is prioritising making changes in other divisions of the business, and as a result, rather than neglecting another part of the business that does not have a large market share or would require a lot of investment to bring up to date, it decides to sell the business.
The way that protection insurance distribution is set up also means that insurance companies may not make money out of the policy until the third or fourth year, where the adviser takes the indemnity route.
The commission is paid upfront to the adviser but if the policy cancels, then the adviser has to pay at least part of that money back.
Lakey says: “So for example, a client comes to me, and he takes out a protection plan for £50 per month. I could get paid something like £1,200, so many advisers will still take that up front as an indemnity payment. So [for the insurance company] it would take them maybe three or four years before they make a profit on that particular case.
“So it becomes very expensive. You have to have capital behind you to go into the protection market. The consolidation is a worrying trend and it will continue. You can look around and see companies that aren't capitalised to a degree, and you have to wonder how long they will survive.”
Lakey is not alone in expressing concern over the trend.
Brokers like Scott Taylor-Barr, director of Leicester-based broker Barnsdale Financial Management, say more consolidation means it could become harder to find cover for those with more complex cases. It could also become more expensive.
Taylor-Barr says: "Sadly, I feel that consolidation in this area of the insurance market is not great news for advisers or clients. As we get fewer and fewer choices, we also get fewer and fewer options for more complex situations.
