The British with-profits market is now "dead" to most life assurers, according to a bleak assessment by analysts at JP Morgan, the investment bank.
However, they believe the two largest life offices that still have "orphan estates" of surplus assets worth billions of pounds - Prudential and Aviva - will continue to write an increasing share of a smaller market.
Mr Gordon Aitken, an analyst with JP Morgan, says that, in spite of offering solid, "smoothed" investment returns for several years, the product had clearly suffered a loss of confidence in the past few years.
"It appears to us that primarily the government but also the consumer will demand that financial products offer extreme transparency," he adds.
"As a result, we believe with-profits sales will continue to diminish."
The combination of poor investment returns, diminished capital and costly guarantees has led to a wave of offices closing their with-profits funds to new business.
Other life offices have responded to the pressures on the with-profits model by offering products that try to meet the call for greater transparency made by the British Treasury-commissioned Sandler report.
Crucially, these new products also seek to address the question of guarantees in with-profits products - such as "money-back"promises, minimum returns and accruing bonuses - that have proved so costly in capital terms to life offices amid low investment and strains on solvency.
An actuary at one leading life assurer says: "Most life offices have not charged properly for these guarantees, the value of which has become much more apparent in recent years."
Scottish Widows, the demutualised life office now owned by Lloyds TSB, last year announced a "new approach" in light of research which it said showed consumers liked the guarantees that are built into with-profits and also liked the concept of smoothing investment returns to help cushion them from short-term equity market fluctuations. It accordingly launched funds with an amount set aside in a "guarantee account".
The demutualised Scottish Equitable, part of the UK arm of Aegon, the Netherlands insurer, concluded in contrast that, if companies charged for their guarantees by reduced bonuses, then that would render the products unattractive.
Scottish Equitable last year launched a "new generation" of with-profits products that do not offer guarantees or bonuses, but have a transparent, smoothed structure that it says meets the recommendation of Sandler and the Financial Services Authority, the City regulator.
Standard Life, Europe's biggest mutual, is considering launching a new suite of with-profits products next year but it emphasised it would not close its existing £29bn with-profits fund.
The shape of the new products has not yet been decided, but they are also likely to have fewer guarantees, and require less capital to support them.
Mr Ned Cazalet, an independent life assurance analyst, says these "with-profits lite" products offer little more than smoothed investment funds unattractive for independent financial advisers who like to market features such as annual bonuses and guarantees.
JP Morgan has also warned that the expense base of the life assurance sector - at 1.73 per cent of assets last year - is too high for the simple transparent savings products favoured by the government.
- (Financial Times Service)
