The life settlement market has undertaken significant efforts in recent years to improve what it considers to be an awareness challenge in terms of the general senior population in the US not always being aware that they can sell their life insurance policy for a lump sum.
The direct-to-consumer market, for example, is proving effective at generating more enquiries not only from the insured, but also from their advisors, like accountants, lawyers, and wealth managers.
The equity release market in the UK has a similar challenge. Unlike life settlements, where the capital comes largely from investment fund managers, the money for equity release mortgages in the UK comes from bulk annuity premiums, itself a market that is undergoing significant growth as more defined benefit pension plans in the country find themselves in a stronger funding position that moves them closer to being able to complete a risk transfer solution.
UK insurers flush with millions of pounds of premiums from bulk annuity deals won’t be able to direct much more of this capital towards equity release products than they already do, however, because there isn’t enough demand to meet the available capital. According to data from EY, supply has outstripped demand each year since 2018, and recent economic events aren’t helping demand either.
“I don’t see demand recovering significantly in the short term,” said Ben Grainger, Partner at EY. “Ongoing increases in UK interest rates are resulting in higher interest rates on mortgages and low advances being made available to equity release mortgage customers, impacting consumer demand.”
Time will tell how long the current interest rate environment will persist. Inflation in the UK remains high – 8.7% in May 2023 – and the Bank of England’s recent 50bps rise is indicative of the country’s efforts to rein in the increase of the cost of living.
When rates do fall, supply should pick up, even if it’s only slightly. But for the market to really move, awareness needs to be significantly higher. One seemingly obvious channel is the direct-to-consumer one – ie: television, radio and other media advertising. It’s a channel that’s delivering dividends in the life settlement market, but unfortunately, in the UK’s equity release market, an equity release provider increasing their TV advertising spend won’t make much of a difference.
“TV advertising is saturated in the equity release market. If you watch TV during the day, then you’ll probably see an ad. But if you don’t, you won’t. This means that spending more on more TV advertising won’t make much of a difference to awareness,” said Mr Grainger.
The market currently remains somewhat subdued. The number of new and returning equity release customers active between January and March this year dipped to 16,691, down 19% from 20,597 in Q4 2022 and down 29% from 23,395 a year earlier.
But still, the awareness issue is a structural one, something that the industry is trying to remedy. The Equity Release Council, the trade association for the industry, has educational initiatives to support financial advisers in their discussions with their clients, and it continues to drive progress in the industry in terms of standards and best practice; in April this year, it, appointed independent chair Michelle Highman to its standards committee, and in May, launched new guidance on post-completion communications, a 17-page report advisers which describes the various triggers for providers to communicate directly with customers.
Other tailwinds to awareness do exist. Martin Lewis, the well-known British consumer finance media personality, recently updated an article in which he encourages British consumers to use a provider that’s a member of the equity release council if they do decide to go down that route.
And there are plenty of other personal finance websites which reference equity release, so as the internet-savvy Generation X ages into the range where equity release mortgages are available (age 55+ in the UK), then awareness should concurrently rise.
Regulators are in on the act as well. The UK regulator issued this press release in 2020 criticising the quality of advice issued by financial advisers, suggesting that it will be “undertaking further work to review the suitability of advice in the lifetime mortgage market.” Exactly what that work entails is unclear – the FCA declined to comment for this story – but the Equity Release Council is already making efforts to educate IFAs via its ‘competency framework’ initiative, so work is underway in that corner of the market already.
UK insurers add equity release mortgage exposure to their balance sheets because they feel that the product offers solid risk-adjusted returns. But also, there aren’t many other options for them in terms of long-term assets to match the long-term liabilities that they onboard during the bulk annuity process, and as has already been stated, they are currently receiving new bulk annuity premiums in record numbers. But ultimately, the growth of the market in the medium to long term will need to be driven by the industry’s efforts in the awareness arena.
“In addition to the current economic environment, the key barrier to the growth of the UK equity release market is a lack of consumer awareness, prompting a need to widen distribution channels and inform consumers,” said Mr Grainger. “But the funding model is good, and consumers have better protections now than they have previously. It’s now a case of the industry needing to continue to educate.”
