Opening keynote speech
[Check Against Delivery]
Today before the fun begins in earnest, I wanted to give you an overview of some of the challenges and issues facing the general insurance (GI) industry.
I am going to touch briefly on five areas which I think are shaping the GI sector and which will interweave with many of the subjects you are engaging with today: the scale and pace of change; regulatory risk; political risk; the evolving consumer and the changing self-identity of the industry.
Let’s start with the scale and pace of change. There is often a danger in life that when something very big and important is staring us in the face, we dismiss talking about it as restating a truism and move onto something else. We mustn’t be that glib about how significant a period of change we are living through and how that will affect the markets of the future.
In big picture terms, we are living through a period in which global economic and demographic forces are reshaping geopolitics, the distribution of wealth and the future prospects of millions of people. This is particularly evident in the fast-changing global GDP distribution which is reverting our world order to a position much more akin in some respects to that of the early 19th century when East-West wealth was more evenly shared. With this, we also see a continued massive growth of the so-called ‘consuming classes’ with a projected 4.2 billion of the world population of 7.9 billion in 2025 able to make discretionary purchases beyond their basic economic needs; compared to just 1 billion people as recently as 1990. For insurers this means two obvious inter-related things; further globalization of capital flows and significant and sustained demand for insurance products, particularly in China and India which are driving the huge increase in numbers.
But the scale of change is not just economic, it is driven by and encouraged by our technological advances as a human race. Even if we look at processing capacities alone, exponential growth should mean that by 2025 we have computing capacities 64 times that available today through mobiles, tablets, laptops and televisions.
Feeding this will be a huge jump in both the production and consumption of data with consumer internet traffic predicted to increase 24% each year between 2013 and 2017. If these advances alone were the only consequence of the digital revolution, they would be life-changing but taken together with the potential growth in cloud computing, additive 3D printing and autonomous robotics, we can begin to comprehend how different these advances will make the world of tomorrow feel.
All of which makes data one of the key challenges of our age; as a society but especially as insurers. I think establishing appropriate standards of data protection and clarity of data ownership across national boundaries at the same time as people routinely cede access rights to large chunks of their data to actively participate in society – including buying insurance – is one of the major conundrums of our age. For insurers the challenges are particularly acute, ranging from having systems good and durable enough to cope, to the problems caused by those excluded from insurance by more accurate data, to having permissions from customers to enable the type of more personalized insurance they think they may want.
Which takes us to regulation where I wanted to flag a few themes ahead of our panel discussion. The first is the increasing internationalization of capital standards for insurers. There is no doubt in our minds that this train has left the station and that it is largely pointless to throw oneself in front of it. The direction of travel from the FSB is clear and as it is chaired by Mark Carney, I would suggest our chances of leading a push-back from the UK are not great. Although attention to date has been focused on the so-called G-SIIs, it is the explicit intention of the IAIS to develop Basel-style global capital standards for the rest of the sector and whether or not these eventually correlate with Solvency II is very much up for grabs.
That does not mean we should ignore or dismiss EU regulatory power. We have spent a lot of time talking about the Twin Peaks in recent years but rather less time talking about the ESAs and the extra powers given to them. They are determined to use them and we maintain a parochial focus solely on the UK at our peril.
We will come onto discuss the UK Twin Peaks experience shortly but I hope we spend more time on the content of the regulatory discourse than the structure. The ABI Board – wisely, in my view – decided back in 2009 not to oppose the Twin Peaks structure per se on the grounds that what worked in the Netherlands or Australia should not be dismissed as unworkable here, as some (including the CBI) were suggesting. Our view is that the agendas of the respective organisations are far more important than the protocols governing how they work together. For the PRA, we see every sign of the Central Bank outlook that greater capital can usually be relied on as the answer to everything but we also see a parent in the Bank of England whose governor regards the UK insurance sector as a national asset and essential to the smooth running of the economy.
The FCA has undoubtedly had more territory to cover in its opening year, as Martin Wheatley has publicly acknowledged. Our view is that it tries to be a more open organization than its prudential counterpart and is genuinely seeking to take a different approach both to its supervisory mentality and modus operandi and to its use of newer tools such as behavioural economics. Our principal disappointment at times has been the lack of co-ordination between different parts of the FCA as thematics pile up and workstreams seem un-coordinated. However this has been taken on board by the executive team and much clearer business planning seems in place for its second year. We felt the report on MLEI was broadly fair and balanced but were frustrated at much of the cheap rhetoric for media purposes which accompanied the Add-Ons report. So plenty to chew on in our panel discussion shortly.
In touching briefly on political risk, it is customary in speeches such as these at the moment, to furrow one’s brow, say the polling is all very close and therefore things are very difficult to predict. I think this is a bit of a cop-out, not least because clear factors will shape whoever is in power in the UK Government after the next election and judgments about political risk are therefore largely about degree. All likely permutation of government will suffer from the short-termism in policy making that will come with a hard-fought and narrowly won election in which the main challenge will be to get voters engaged enough to vote.
This ‘attention deficit politics’ is with us for the forseeable future and we will see ever more of it as social media takes up more of the voters’ attention, relative to other media and as politicians with ever fewer levers of power seek to maximize the public impact of their actions. Equally, the financial strait jacket facing the next UK Government between 2015-20 is already plain to see. For all parts of the private sector, including insurers, this means an increased risk of Government levies to pay for pet projects and demands that we pay for the things we still want to be provided. This has already happened with the insurer funding of the police insurance fraud operation and we could see a lot more of it.
Providing much of the justification for any such ‘tax and grab’ policies will be the ongoing poor esteem with which the whole of the financial services sector continues to be held. This is unsurprising given the largest economic crisis for 80 years but it is also a reminder of the long duration of the life insurance mis-selling scandals and asbestos crises of the 80s and 90s, the ongoing reverberations of PPI and the continuing reputational risk for general insurers posed by the poor understanding of the existence of new business discounts and lack of transparency over renewal pricing.
This is where areas of political risk bumps very firmly into the analysis across much of the industry about how consumers are evolving. This is particularly true of the so-called Generation Z of younger digital native consumers whose attitudes to data, purchasing habits and risk profile are so markedly different from people even 15 years old than them. It is a startling thought that somebody in their early 40s like me typically has more in common in background, buying attitudes and technological competence with someone in their mid 60s than a 29 year old who is closer in age. Looking round the audience I suspect I am not alone.
But while the digital natives are still relatively confined into two demographic age groups, their habits are spreading quicker. Analysis by PWC has suggested that by just 2019, the behavioural norms of the digital native will dominate the insurance market. This means we all have to adjust to hard-wiring different ways of dealing with customers and it is impossible to imagine a future where customers will not require as the norm i) Interactivity, especially on dispute resolution, II) Proactivity, especially on claims, iii) Greater personalization and iv) greater transparency, especially on the use of risk factors. And I think we can see evidence of all those trends gaining momentum in the market today with competitive advantage for companies that gain traction.
So let me draw my remarks to a close by considering what this means for how the industry handles these challenges. For us at the ABI, being as publicly reticent as the industry has sometimes been in the public policy and regulatory space is no longer an option, either for brands or for insurers as a whole, GI and Life included. We need to be more assertive, about our macro-economic and social importance, about our performance and about the public policy issues that affect our businesses. This means becoming more proactive in public policy, with some of the inevitable uncomfortable tensions and long slog this involves. It means insurers have to continue to place a premium on collective ways of working and united industry-wide action, wherever possible. And it means we need to get better at removing open goals by continuing to self-regulate, where appropriate, and also ask regulators publicly for industry-wide action where necessary. I see signs of all these trends in the GI market over the last few years and think we have a generation of industry leaders who largely get the ever more complicated interdependencies between reputational, political and regulatory risk.
So I hope this has proved some food for thought to kick off the deliberations today. We face fascinating challenges and represent a sector that is absolutely critical to human, social and economic progress. With that level of importance comes increasing amounts of risk and potentially vast amounts of commercial opportunity. I hope today we can all think constructively about how to take it.