Next year, the British public is likely to focus on the preparations for the London Olympics and the Queen’s Diamond Jubilee celebrations, both due in 2012. For the insurance industry, this will be the most significant single year in living memory.
Tim Breedon is chairman of the Association of British Insurers and group chief executive of L&G Photo: Newscast
A series of game-changing reforms will come together in 2012, presenting a defining juncture in the way our industry is funded, regulated and provides products. We have just a year to get these changes right.
Delivering change effectively matters to the millions of customers we serve and the wider economy. Insurance fulfils an important social purpose by protecting people against the financial costs of unexpected events. It also helps create a more resilient society – resilient against the costs of floods, resilient against the costs of rising longevity. We also help when it comes to accidents, sickness and bereavement.
Insurance works best when there is a clear and effective partnership between the industry, its customers and policymakers. Each member of that partnership needs to be clear about their obligations if we are to provide products people need at prices they can afford. This has never been more important than it is today, as the shrinking state forces people to be more self-reliant, and the “Big Society” encourages greater diversity of provision in goods and services in return for greater responsibility and social engagement on the part of business.
I often think of the UK insurance industry as a modest, relatively unobtrusive giant, but we employ 275,000 people, contribute £8.2 billion in taxes and are a major exporter. As investors, we manage assets amounting to almost a quarter of the UK’s total net worth. We provide insurance services covering 90pc of UK households, providing long-term security through pensions and short-term security through products such as travel insurance and public liability cover.
By the end of 2011, UK insurers will need to be ready for a new European capital regime under Solvency II, a dramatically altered regulatory structure in the UK and Europe, and the introduction of automatic enrolment into pension schemes.
Alongside this, a radical reform to the way people buy financial advice will go live, benefiting customers through transparency on charges and increased adviser professionalism. The insurance industry will have to finalise a way forward on provision of property insurance for people in high flood-risk areas, ahead of the end of the industry’s agreement with the Government in 2013. There is also much to be done to realise the ambition to pass on to insurers some of the risks currently borne by the state in areas such as long-term care.
The EU capital directive, Solvency II, seeks to create a modern and effective capital regime for insurers to operate within all 27 member states. The ABI supports this aim and – as the UK has the largest insurance sector in Europe – we have a huge stake in getting it right. If done badly, over-influenced by banking worries, and the sector is required to carry excess capital, the 450 million insurance customers within the EU will have to pay more for their insurance. This would hardly be compatible with the idea of greater personal responsibility and choice – individuals cannot be expected to make sensible choices about managing risks if the price of doing so is driven too high as the result of poorly thought-through regulation.
These changes occur under the shadow of major structural reform to the bodies that regulate insurers in both the UK and EU. The reforms have been driven by failures exposed during the banking crisis, but we need these new bodies to be effective for insurers and differentiate between banks and insurers in the way they are set up and operate.
Insurers and banks are vital to each other, but operate in fundamentally different sectors; insurers operating for the long-term with assets matched to liabilities while banks manage short-term risks from a highly leveraged capital base and rely upon liquidity. “One size fits all” regulation makes no sense, intellectually or in practice, when the risks each sector runs are so profoundly different.
We also need to keep the regulatory implementation costs, which are ultimately paid for by customers, to a minimum. The ABI has estimated that the average cost for each large firm of implementing Solvency II, excluding any capital increases it may involve, could be as high as £100m. The FSA has upped its estimate of the cross-industry costs over the first five years of its reforms to sales of investment products to between £1.4 and £1.7bn. Both reforms can and should benefit the industry and the consumer if done right. But key judgments still need to be made correctly for this to be the case.
Competitiveness matters and I want the UK to remain a leading global financial centre. For insurers, holding and moving large amounts of capital is at the heart of our business model. Taxation of capital and income, for example on profits earned abroad, is one of the key issues firms consider when deciding where to headquarter. The Treasury has made real progress here, outlining a five-year plan to make the UK competitive.
The insurance industry’s response to floods showed how we can react quickly and effectively to customer needs, and we must make sure this ethos extends into all our work. We must never forget that insurance is a social good and must always be as available and affordable to as many people as possible. We also have to be sure our products work for customers, giving clarity on what customers can expect of insurance, ensuring quality complaints processes and being honest about whether a product is suitable. A customer relationship that works is one where both parties understand what is covered, where genuine claims are met quickly, and where both parties can be confident they are operating within a predictable regulatory framework.
Finally, the next few years could see the industry develop in new areas as the coalition Government publicly considers more varied provision of public services. We need to show we can work with Government to develop workable alternatives to state funding to assist with welfare reform, helping in areas such as long-term care. So we need to build industry-government trust through resolution of issues such as provision of insurance in flood-risk areas and auto-enrolment into a pension scheme. Success here means that perhaps the industry can step forward in other areas.
So insurers face a critical time as the new year beckons with challenges and opportunities in every area. It is vital we work effectively with government, regulators and, most of all our 57 million customers in the UK to get this right.
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