COLUMN-Life - what's the point?: Neil Collins

-- Neil Collins is a Reuters columnist. The opinions expressed are his own --

By Neil Collins

LONDON, July 14 (Reuters) - What is the point of a life assurance business? At first sight, the answer is obvious: people need to insure themselves against disaster, in the same way they should insure the house against burning down. However small the likelihood, it's a foolish homeowner who risks the catastrophic cost of rebuilding.

The life offices long ago discovered that there's not much money to be made in covering people against sudden death. The products are easily compared, so the prices are competitive, and besides, death is a tough sell. The real money has been made, not in protection against disaster, but in blurring the distinction between protection and savings.

Savings products produce much higher premia. They can be dressed up with fine-sounding names like "endowment", and allow the companies to show smiling happy people whose policies have just matured. No mention of death is necessary, merely a subconscious appeal to a breadwinner worried about what happens if the bus gets him.

Now, though, it looks as though the game may be up. The mis-selling of endowment mortgages, exposed by years of dire investment returns, forced the life offices into inventing other opaque financial products. Too many of these were designed to reward the intermediaries, rather than to offer something valuable to the customer. Disillusion has encouraged lapsed policies, or churning from one high-cost product to another.

The stock market has sensed this. Life office share prices are depressed. Valuing streams of future income is about as easy as predicting inflation or currency movements, even for those who can understand the arcane language of life that the companies speak. The industry needs rationalisation and shrinkage, and two people with form here believe they can make a killing while doing so.

Clive Cowdery, the man who will run any business as long as it's called Resolution (RSL.L), has 600 million pounds of other people's money burning a hole, and has already been given a raspberry by Friends Provident (FP.L), a small and rather accident-prone life office. Serial entrepreneur Hugh Osmond will be in there just as soon as his new Pearl can get itself a currency by listing on the stock market.

Yet this consolidation play may turn out to be a pretty profitless process. Rather like some of their customers, the life offices may be worth more dead than alive. The fund management arm of Legal & General (LGEN.L), for example, is probably worth more than half the company's market value. The Prudential (PRU.L) might be better off without its UK business altogether, while Aviva (AV.L) has betrayed unwitting contempt by scrapping a decent brand in Norwich Union.

Aviva is itself a collection of old names, and has demonstrated that putting together the offices is easier said than done. The cost of merging such diverse products and systems has discouraged L&G, long considered one of the better-run houses, from making any acquisitions, even those that looked like bargains.

As if all this wasn't enough, the Financial Services Authority is now threatening to outlaw commissions entirely. If one thing can sink these tired old dreadnoughts, it will surely be a successful implementation of that ban. Cowdery, Osmond and the remaining captive policyholders have been warned. For previous columns, Reuters customers can click on [COLLINS/] (Editing by Martin Langfield )