LONDON (Reuters) - The life insurance and pensions industry is losing billions of pounds a year as firms splash out to attract clients but fail to keep them long enough to cover the cost, according to a report released on Wednesday.

Customer loyalty -- known in the insurance industry as "persistency" -- has long been seen as a problem for a sector where each new client comes with a hefty price tag in commissions and set-up costs, but often leaves before the investment has been recouped.

Wednesday's report by professional services firm KPMG said the problem was worsening, with insurers lagging behind sectors such as retail banking as few firms made comprehensive efforts to retain customers.

"The bulk of the efforts of a life company, about 90 percent, goes into acquiring new business and perhaps only 10 percent is spent on existing customers," Craig Graham, a financial services partner at KPMG, told Reuters.

"The use of retention teams is far more prevalent in retail banking than in life assurance. There are next to no examples of products that reward loyalty in life and pensions."

KPMG said it estimated that in 2004, new business added 1.2-1.8 billion pounds to embedded value -- an industry measure that values how much a life insurer is worth to shareholders -- in the UK sector. But the value of surrenders and paid-up policies was likely to have been 2-4 billion pounds.

More than half of the money paid out by the industry in 2004 was due to the surrender of policies before they hit maturity.

Customers have little incentive to remain loyal, as many contracts have low or no initial charges and intermediaries selling insurance depend on a steady stream of new sales.

One worry in the persistency debate is that much of the industry's "new" business reported every quarter is actually business shifted between firms as customers seek better deals.

KPMG said the industry should report "net new business" to exclude "recycled" customers.

"Part of the difficulty the industry has had is that analysts put so much focus on new business volumes, and the insurers structure their business around that," Graham said.

"Compare that to the investment management or mortgage industry, where analysts focus more on net new business. They can look at new business, but should look at net, not gross."

KPMG's survey included 11 of the country's top life and pensions companies and 20 of the leading banks and building societies.

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