In the last five years or so, a handful of major life insurers in the United Kingdom have embraced what for them is a new wealth-management technology—so-called wrap platforms.Wraps, as the Web-based, business intelligence systems are called, enable independent financial advisors, or IFAs, and their customers to view and manage, in one application, a range of investment products that includes pensions, bonds and many types of savings vehicles, some with life-insurance-like features.
Insurers may one day use wraps to sell general insurance, but for now their attention is elsewhere: According to industry estimates, the U.K. wrap market was worth 35 billion pounds ($68.9 billion) in 2006 and could swell to 256 billion pounds ($504 billion) in 2010. Analysts say growth will correspond with a drawdown in the managed assets of traditional players, which include large life insurers.
"Wraps are creating great fear in the life and pension companies," says Steve Williams, U.K. manager for Bravura Solutions, a provider of wrap solutions, with headquarters in London and Sydney.
Williams says that, for these companies, "their value is closely linked to the assets they manage on behalf of their customers. One big life insurer has 90 billion pounds ($176.5 million) in assets under management. They've realized that their assets are going to migrate." Williams says, "The threat is huge. It's not a question of whether or not [life insurers] move to wraps. It's a question of whether they can do it fast enough."
In fact, wraps have been in wide use for more than a decade for selling and managing investments in the United States, Australia and New Zealand. In the United States, Prudential, AIG and MetLife are using wraps for asset management. In Australia, where dozens of wraps are operating, wraps account for 85% of individual investments, says Williams. Australian wrap software vendors lead the U.K. market, because of the countries' similar financial markets, says Catherine Stagg-Macey, a senior analyst in the London office of Boston-based Celent LLC. Wraps have not reached the mainland European market, where banks tend to dominate the retail investment market, she says.
Spurred by pension-fund failures and pressing retirement needs of aging baby boomers, the United Kingdom recently eased tax and other laws governing pensions and other investments, allowing individuals greater control of their wealth. That and the rapid rise of the Internet as an investment tool have begun changing a stodgy industry in which most retail investors still depend on old, paper-pushing financial advisers.
Says Williams: "For a [traditional] advisor to provide holistic advice on a portfolio, he has to write to pension providers, write to savings vehicles, and so on, to get valuations for each product. Then he has to analyze each product, its worth and how it's performing over a long period, to build a picture of what an individual customer is worth and then help him set risk-appropriate investment and retirement goals. That's what some would call an 'unserviceable environment,'" he laughs.
With a wrap, the IFA gets up-to-minute evaluation across all of a customer's investments," says Williams. "That significantly enhances their services," he observes.
True wraps don't favor any one investment company's brand, "so the advisor can make choices based on the instrument's tax properties and other investment benefits, rather than its manufacturer," Williams continues. "He can concentrate on managing portfolio risks, exposures and tax incentives to align them with the customer's life goals."
U.K. investors still tend to go through IFAs, which can be companies or individuals, to sort through complex layers of tax advantages-onshore bonds and offshore bonds, self-invested personal pensions, personal equity plans and individual [retirement] savings accounts, says Nick Blake, national sales manager for Standard Life Assurance Limited.
"Sometimes you get the tax break buying in-sometimes cashing out," Blake says. "Everybody focuses too much on the software of wraps. Wraps are taking over because they are changing the experience of the customer. They get better-quality service from their trusted IFA."
Consequently, wrap services are aimed at IFAs, not directly at private investors, with many including client-management tools, and support for fact finding, risk profiling, asset allocation and tax planning, says Stagg-Macey. According to one industry survey, 70% of IFAs expect to have most of their business on wraps within two years.
Observers disagree over what constitutes a true wrap.
"During my research it struck me that there was a real problem around the definition," says Stagg-Macey. She says some platforms have some features of a wrap but not open architecture, thus restricting the range of products.
For Williams, "A wrap is open architecture and not product-specific." So-called fund supermarkets have similarities but are limited to consumer direct buying and selling of assets.
Blake of Standard Life Assurance Limited agrees, saying that "some companies [with wraps] haven't cut loose from their own products." He says Standard Life's "wrap is completely agnostic as to [investment] product. We know the advisor wants to have completely free reign. Administering other people's funds, my charge is the same. If you overload the wrap with your own stuff you get found out pretty quickly."
With the standard IFA approach, "annual costs can be outrageous-2% of the value of the portfolio," Williams says. "Pension and life companies have hidden costs, such as exit and entry charges. Customers are very easily sold on the value of wraps," because costs are lower and transparent. "The IFA charges a one-time upfront fee for management."
However, Stagg-Macey says that the cost of wrap management remains high enough to restrict their appeal to a fairly small number of high net-worth individuals. It could be extended to the middle market."
Of the ten wraps in the U.K., insurance companies own or have involvement with three. Norwich Union entered the market by acquiring an established wrap, Lifetime. Standard Life works with specialist First New Zealand Capital. Abbey Life has a platform. AXA UK, Prudential, MetLife and Friends Provident are working on or considering wraps of their own. Skandia is the U.K.'s largest wrap with 35,000 IFA clients. Transact, the country's oldest wrap, is owned by IFAs.
STILL AT STAGE I
"Wraps give life insurers a way to market their pension-related annuities," Stagg-Macey says. Annuities have life-insurance mechanisms for payout in the event of death. But the question logically arises of when insurers will sell general insurance products on wraps.
Says Blake: "Insurers' wraps are only at Stage 1 of the evolution. For now, it's about delivering products for intermediaries and taking a profit. The wrap will record that you have life insurance, but the transactions are made offline or on another system. Someone has to enter it into the platform."
"Later, we'll add risk-based products, life insurance and debt," Blake says. "That's one of the phases the wrap needs to get to be all encompassing for the IFA. We don't do general insurance, but in the future the wrap could hold it-to build long-term relationships."
Richard Berry at Adnitor, a consulting company specializing in financial services, says, "the market is very much going forward. Insurance products will be included on wraps. However it is difficult to put a time scale on it. To set up a platform around investments is already expensive. It ultimately comes down to demand, but certainly there are technological issues to work out."
At AXA UK, "we're at an advanced stage of planning," says Peter Webb, a spokesman. "It's definitely part of a market we're going to play in fairly soon. We're a global player, which gives us the advantage of being able to learn from our Australian and U.S. units." As for selling insurance products on a wrap, Webb says, "We'll have to wait and see."
Stagg-Macey says that insurers don't necessarily understand the size of the job when they get on the wrap bandwagon. "Technologically, the implications of wraps can be huge. You can have 17 different providers, so that means connections to 17 different systems to integrate," she says.
Blake agrees. "It is a lot harder than you think it is," he suggests. "For Standard Life, the big challenge was integrating the wrap platform products with the products from the company."
Williams says Bravura supplies wrap software to pension and life insurance companies. "We provide the whole stack-all the things you've got to have," he says. "There's a common functional layer, [modules for] customer management, configuration, billing and collecting, correspondence, money handling-money in and money out-and, of course, report generating. We can mix and match functionality." But he stresses that a wrap is an integrated system, based on performance and scalability.
Williams says current Bravura systems run in Java2 but the company is upgrading to Java 5. The service can run on platforms that include UNIX, Linux, HP, IBM, Sun and Windows.
"One of the misperceptions is that all we're doing is combining a bunch of products," says Williams. "That badly misses the point. They [potential customers] say, 'We already have a pension system and mutual fund system-why can't we just put on a front end to access them?' Well, that would be a horribly expensive technical investment."
Williams says big insurers trying to hold onto their legacy systems will forfeit the transparency of a true wrap platform. "You can't turn a behemoth inside out to make it into something nimble," he says. "A built-from-scratch player without baggage can act quickly bring together unique aspects of a typical life insurance, pension and investment management system into one system."
Wrap platforms are in reach for insurance companies, Williams says. Insurers should set wraps up as a separate business because wraps differ from legacy systems.
Blake, at Standard Life, counters that "we can't just ignore what we've been doing for the last 30 to 40 years. Many things about our legacy are excellent. Sometimes people say you should have a completely clean sheet of paper. But that can be code for [saying] they can't quite figure out what to do with what you have."
Rick Mitchell is a business writer based in Paris.
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