The Geneva Papers on Risk and Insurance Vol. 28 No. 3 (July 2003) 502–509

Irish Life: Paradise Lost and Regained by David Went

Introduction This paper seeks to demonstrate how significant the effect of strategy change has been for my company, Irish Life & Permanent plc, and how that change has delivered in terms of value creation for shareholders. In particular, I want to look at how our life business in Ireland – Irish Life, the country’s largest life assurer – lost and regained its competitive advantage in the 1990s. The Irish Life & Permanent Group Irish Life & Permanent (IL&P) is the product of a merger of Irish Life Assurance and Irish Permanent in 1999. This somewhat unusual combination brought together the largest life company in Ireland and the largest residential mortgage provider, both with shares in their respective markets of over 20 per cent. In April 2002, the further acquisition of TSB Bank and its merger with Irish Permanent created a full service retail banking operation in Ireland. We believe that Ireland with its strong and fast growing economy and attractive demographics offers tremendous opportunities for our business given our strong franchise and market shares. Our ambition is to become the number one provider of personal financial services in the Irish market and we are confident that, with the business model which we have created together with our singular focus on Ireland, we can achieve that ambition. This article focuses primarily on Irish Life and, in particular, the larger retail life business which has undergone rapid transformation and growth over the past few years. The Irish market in the 1980s A little history on the Irish market to begin with. In the 1980s the Irish life and pensions market was pretty stable. It was dominated by Irish Life and a number of large U.K. insurers with very little crossover into other areas of financial services. In practice, barriers to entry were high, with strong established brands and distribution either captive or loyal to existing providers. At the same time there was a low level of consumer awareness generally. This, together with a combination of tax favoured products and a strong equity market backdrop, drove strong volume growth at attractive margins for the life industry. So Ireland was a nice place to do business for incumbent life offices even if the economy was operating below its potential, struggling under the weight of a massive debt burden with  Group Chief Executive, Irish Life & Permanent plc, Ireland.

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high taxation, high interest rates and high unemployment. In fact, the opposite of where we are today. Irish Life at that time was the dominant life assurer in the market. Its business was almost entirely focused on Ireland (with a small U.K. branch operation) and that business was very much life assurance. What made it successful was its strength in product innovation and its distribution reach. Irish Life pioneered unit-linked products in the Irish market in the 1970s and was consistently ahead of its competitors in bringing new products, principally in the pensions and investments areas, to market. In addition to strong product innovation, Irish Life had the distribution strength with the largest direct sales force in the country (over 500 strong) and the largest supporting broker or IFA network. Irish Life stuck to what it was good at: it had a powerful franchise in its domestic market and it focused on that market, leveraging its product and distribution skills to the full. Into the 1990s in Ireland But, as we all are only too aware today, nothing stands still and the 1990s brought major changes to the market. Deregulation reduced the barriers to entry and banking groups entered the life market. Allied Irish Bank and Bank of Ireland, the two largest banks in Ireland, set up bancassurance operations and rapidly gained market share, principally at the expense of Irish Life. Bancassurance has been hugely successful in Ireland, and today bancassurance, including the branch-based business of IL&P, now accounts for about 40 per cent of the retail life market, from zero per cent in the late 1980s. This period also saw the start of greater investment market volatility – the crash of 1987 and the Gulf war – and, perhaps more importantly, the onset of lower inflation. Returns fell and the consumer became disillusioned and far more conscious of value for money. Irish Life into the 1990s So how did Irish Life adapt to these changes? Well we diversified. We embarked on a series of overseas investments starting in the U.S. and then moving on to Norway, France, and eventually Hungary. In strategy terms this was conceived as a diversification of earnings streams; in hindsight it was more a case of excess capital chasing an outlet, and faraway fields seemed greener. More seriously, this diversification represented a loss of focus and the core business suffered as a result. The reliance on the existing distribution increased and the direct sales force fossilized and resisted the changes needed to adapt to the changing demands of consumers. On the product side, the sole reliance on the performance of in-house actively managed funds created a vulnerability that impacted the wider business as performance of those funds faltered. The confidence of our distributors and customers in Irish Life suffered. Indeed the confidence of the company suffered. All in all this resulted in a steady erosion of our domestic competitive position. We lost market share and margins deteriorated. By 1997 our retail market share was down from 20 per cent to 8.5 per cent and we earned little positive value of new business. The challenge of value creation There are great benefits in being focused. Everyone is clear what the objectives and tasks are and there are no hiding places or comfort zones to retreat to. It’s succeed or die.

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Of equal importance, of course, is knowing, understanding and nurturing the strengths that are the source of the company’s competitive advantage. In Irish Life’s case, and this admittedly is clearer with the benefit of hindsight, it needed to get back to its knitting. Back to its home market with a new generation of products and to make good the gaps and weaknesses in its distribution. It was all the more urgent that it do this at a time when the Irish economy was booming and there were huge rewards if we got it right. So what have we done? Well quite a lot I think. Exit overseas The first priority was to exit overseas businesses. None of these businesses had either the scale or unique selling point to give them the chance to succeed. On top of this was the difficulty in trying to manage these businesses from a distance with an imperfect knowledge of the market. Of course it can be done but it requires an investment in people and processes that we did not make. Apart from distracting attention from the core business, most of these overseas operations ultimately produced poor returns and diluted return on equity for the group. So we divested the business in Norway, closed the business in France, sold the stake in the Hungarian bank back to our joint venture partner, KBC, and are well advanced in the process of selling our U.S. businesses (we sold two in 2001 and the final one will go by June 2003). We do still have two small businesses in the U.K. Neither is ultimately strategic but they do deliver attractive returns. So this exit strategy has brought us back to being very much focused on the Irish market where we are happy to be, given the economic and demographic profile of Ireland, and where we must succeed. Merger with Irish Permanent As I stated above, bancassurance was the big winner in distribution in the 1990s. Irish Life did not have access to its own retail bank network in the 1990s and lost market share as a consequence. We operated a tied agency arrangement with another institution but this was not a very happy experience. Irish Life found itself investing considerable marketing, training and other support for the products which we supplied through this channel but were increasingly squeezed on margins. The major strategic step in addressing the bancassurance deficit was the merger with Irish Permanent in 1999. Irish Permanent was a demutualized building society with a branch network then of over 90 branches and over 500,000 customers. While Irish Permanent did have its own bancassurance operation it had a weak in-house life assurance brand and an outmoded sales process in the branches. Irish Life introduced its product set and its sales and management processes into the branches. This involved a massive retraining of the branch staff. We set a target of doubling sales over three years and actually achieved this in a little over two years. Merger with TSB Bank In April 2001, the group took another important strategic step forward with the acquisition of TSB Bank – a retail bank with 80 branches and over 350,000 customers. The

# 2003 The International Association for the Study of Insurance Economics.

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TSB acquisition brings the group a full-service retail banking franchise, broadening our offering to customers, and the opportunity to build an even greater bancassurance presence. TSB did distribute bancassurance products using a variety of providers, including Irish Life, but was operating considerably below its potential. We hit the ground running when the transaction completed in April 2001 with a massive networking of staff to sell life and pensions products. The benefits from this were seen in the full year outcome for 2001 when overall bancassurance sales were up over 95 per cent on the prior year, and 50 per cent up again in 2002. The integration of Irish Permanent and TSB is now complete. Included in our integration targets are revenue synergies of between A 20 and A 25 million, about 60 per cent of which will come from bancassurance sales. We are well on the road to achieving these, together with ambitious cost savings targets of A 29 million (up from A 27 million). Brokers Still on the distribution side let’s look at the broker or IFA channel where again we have made great strides forward after a period of stagnation. Key to recapturing the attention of independent intermediaries is the product offering, assuming, of course, the remuneration package is competitive. Following the merger of Irish Permanent’s life subsidiary with Irish Life’s retail business, the retail life product range was completely overhauled. Greater transparency, better value and more options gave us the strongest product offerings in the market and won broker support. The second step was for us to move to a more differentiated service offering to intermediaries. Heretofore we had adopted a ‘‘one size fits all’’ approach. This was alright in a situation where brokers needed you more than you needed them but was inefficient and ineffective in the competitive scramble for distribution that we have today. So we segmented the service and support offering to brokers, focusing more resources on the larger producers, and this paid off in spades. We won the Best Life Company award in 2002 in the Service Awards of the Irish Brokers’ Association. One of the challenges in operating a multi-channel distribution strategy is the management of the conflicts that inevitably arise between channels. In the case of a bancassurer there is an even greater degree of sensitivity with brokers and intermediaries who fear the bank will abuse the information available to it through the money transmission system to deal directly with customers. Our ‘‘broker charter’’, whereby we flag and protect broker customers, specifically addresses this and other concerns of brokers who consequently do not feel threatened by our bancassurance operations. So we have made tremendous headway and can make more. We have a highly productive consultant force servicing brokers and we are currently rolling out new technology to brokers which will allow them online application, underwriting and policy issue. Cornmarket The other distribution development in the broker market worth highlighting is the acquisition in 1999 of Cornmarket, a specialist public sector affinity group brokerage. This company has a well-developed franchise in a very attractive niche sector and is enjoying strong growth on the back of the rise in incomes and employment in those sectors. Again we have successfully managed the potential disquiet of other brokers when making this

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acquisition. You could say we were a couple of years ahead of AMP when they bought Towry Law. Cornmarket operates on an arm’s length basis with Irish Life’s Corporate division, which has seen new business from this source double in two years when public sector pay has risen very rapidly.

Salesforce Finally, on the distribution side let me turn to our salesforce distribution where we have seen a remarkable turnaround over the last four years. This channel was a problem child for Irish Life for a number of years with declining efficiency and productivity, archaic procedures and practices and poor quality staff. Our efforts to put this right culminated in a 17-week dispute or strike in 1997. Now this dispute was not about money but about management’s right to manage. Management won. Following quickly on this victory we introduced new sales and activity management processes and set about transforming the salesforce into a professional and efficient operation. We shrank its size by about 33 per cent, rooting out poor performance, and raised the bar on the quality of new recruits. These and other changes had a dramatic effect on performance with production for established sellers increasing by 300 per cent by 2001, a huge turnaround. We are confident that we have now created a world-class salesforce and we are also confident there is more to go for. We have just rolled out new (Siebel) point of sale technology to the salesforce which will greatly improve the efficiency of the sellers as well as improving the quality of the sales process for the customer.

Unrivalled strength and diversity* Institutions 9%

Intermediaries 33%

Permanent TSB branches 29%

Salesforce 29% *Retail life sales, December 2001. Figure 1: Irish Life, distribution

# 2003 The International Association for the Study of Insurance Economics.

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Irish Life distribution chart Figure 1, showing the retail distribution mix for 2001, underscores the progress that we have made. From a position in 1997, where brokers accounted for 50 per cent of new business and our direct sales force 40 per cent, we now have a broadly balanced mix and most significantly have created a highly productive and profitable bancassurance channel. (In 2002 this channel accounted for 38 per cent of total sales.)

Irish Life product innovation As I mentioned earlier, product innovation had become a neglected competency in the life business. This, together with a dependency on our poorly performing in-house asset management operation, contributed further to the loss of market share in the early and mid1990s. It was imperative therefore that we tackled both the direct product offering to the customer and the underlying investment offerings supporting the product. On the investment side we responded in three ways, each of which has been very positive: •

• •

Firstly, we developed a series of consensus or passive investment products ahead of all our competitors in the market. Indeed, our competitors derided us for doing so. Five years on we have some A 5 billion in passive funds and a fantastic track record, over one, three and five years, in our flagship pension consensus fund. Secondly, we overhauled our active management process implementing a rigorous valuebased active style. Happily, after a bumpy start and the madness of the tech boom, value has reasserted itself and our performance has rebounded sharply. Finally, and this was perhaps the most difficult issue for us, we gave our customers the choice of a range of external fund managers in addition to our in-house funds. For example, we are now exclusive distributors of Fidelity funds in Ireland.

This combination of all these initiatives in the asset management area gives us an unrivalled range of fund choice and removes the vulnerability of the business to a dependence on a single product offering. Our Retail Life business has also been to the fore in product innovation, in particular in tailoring products for the mass market and in anticipating shifts in consumer demand. A key feature of this has been the way that we present and structure our products. We have removed the actuarial mumbo jumbo which was a feature of the life market in Ireland and made the products easy for customers to understand. All our products carry the ‘‘Crystal Mark’’ for plain English. More importantly from the customers’ perspective, we have changed the charging structure. Typically charges are now lower, are spread over the life of the product and are more transparent to the customer. In the corporate life business we have also stolen a march on our competitors in the product area. We were first to identify the size of the opportunity in defined contribution pensions. We invested in a U.S.-style 401K package system and customized it for the Irish market. This product/service offering coupled with our extensive range of investment options has proved a real winner and has enabled us to win the majority of new DC schemes in recent years. All in all, then, this strength in product innovation has made Irish Life the premier product provider in the market. This, coupled with our distribution capability, has created a powerful competitive position.

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Irish Life product mix On the product side, as can be seen from Figure 2 which sets out new life business in 2001, the product range is broad and well balanced.

Group pensions 22% Indv. pensions 16%

Risk/protection 17%

Lump sum investments 18%

Savings 27%

*Retail and corporate life sales, December 2001. Figure 2: Irish Life, product mix

Regular premium savings business is the bread and butter of bancassurers. This is a market where we enjoyed phenomenal success recently on the back of a government incentive scheme and our increased bancassurance capability, doubling our market share. We dominate the group pension market which in 2001 accounted for 22 per cent of sales and here we are particularly strong in the rapidly growing defined contribution market. Increased employment, income growth and generous tax incentives are driving strong growth in this segment. As might be expected, the recent volatility in investment markets has reduced demand for lump sum investment products. However, longer term we see the low interest rate environment in Euroland as sustaining what is a secular shift from deposit type products into the lump sum equity type products which Irish Life provides. Sales and margins chart So what has all this progress in products and distributions channels delivered? Well as Figure 3 shows, it has translated into a massive increase in sales volumes over the past four years. And this has been accompanied by an increase in margins as lower cost bancassurance distribution has been added and we have enjoyed the scale benefits from strong volumes. Transformed life business So the Irish Life business of today is pretty much back to the position of strength it once had but lost. It has refocused on its core domestic market and added, and integrated with, a very complementary retail banking business. The result is a robust multi-channel, multi-

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Figure 3: Life, sales and margins

product business model which provides customers with comprehensive choice in terms of how they wish to do business and in the type of products and services they require. But the journey is far from over. Life companies, Irish Life included, have significant progress to make in terms of the quality of service delivery which consumers expect and demand today. We have recognized that and are now embarked on the next stage of the transformation of our business through our Horizon project. This involves re-tooling our life operations to deliver service quality and reliability to customers while at the same time improving operational efficiency, allowing us to compete profitably in a world of tighter margins. Conclusion Management fashions come and go, particularly as regards strategy. I can only say that focus has worked for us. The clarity that comes from focus aligns the interests of all stakeholders or where there is a conflict or problem it quickly surfaces and forces a solution. Focus does not leave too many hiding places or comfort zones. All businesses have to keep asking themselves the question, why do we deserve to make a return from this activity and how can we continue to do so? This brings us back to what competitive advantages we enjoy and how we protect and develop them as the competitive environment changes. We lost sight of that for a while in Irish Life and paid the price. But we got back on track. The management team applied great effort and discipline in rebuilding the business around our core strengths and in doing so have created enduring value for shareholders and other stakeholders in the business.

# 2003 The International Association for the Study of Insurance Economics.