2 June 2015
It's a pleasure to be here. I am conscious I am your fifth keynote speaker of the day which can be a challenge from both attention span and new content considerations so I aim to speak for 20 minutes and allow up to a similar amount of time for questions so you can get the value you would like from my contribution.
The more observant among you will have noticed the ABI has changed its Director General since this event last year. Instead of someone with a Norwegian name and a Scottish accent, you now have someone with a Welsh name and an English accent. We are nothing if not cosmopolitan at the ABI. I have been at the ABI for six and a half years, most recently as deputy Director General, having previously worked in banking, journalism and politics. Like many people working in the insurance industry, I didn't grow up dreaming of spending the most important phase of my career in this sector, but neither did I realise just how vital and interconnected the insurance and long-term savings industry is to just about every aspect of our economy, society and national and international well-being. In my remarks today, I want to explore how this vital sector can be fully fit for the future, maximising the opportunities available and meeting the challenges. In doing so, I will build on the analysis contained within this excellent publication 'Identifying the Challenges of a Changing World' written (by me) in 2013.
Fast-Changing World
In stating that we face a fast-changing world, moving at an astonishing pace on so many fronts, I am conscious it is difficult to make such a momentous change sound impactful. Yet, I think we face a danger that in the developed world, we all become a bit bored by the speed of change and the impossibility of predicting how it will end up and we end up switching off or developing a sense of ennui when it is talked about.
We need to resist that temptation and keep ourselves fascinated by the combination of trends shaping our world as we know it today and how we and our children will live in it in the future. In particular, I hope our sensitivities are heightened this year as politicians prepare for the UN climate change summit in Paris in December which offers probably the last opportunity to shape a global agreement on limiting climate change to 2oC.
But for my remarks today, I wanted to highlight three trends shaping our modern world which are particularly critical to insurers.
a) Globalisation.
Because most of us live comfortably in one of the richest countries in the world, on the richest continent in the world, it can be easy to see globalisation as something happening largely elsewhere; a catching up rather than a convergence. Yet a walk down the high street of any formerly industrialised community in Western Europe would disabuse most of us of that illusion and we see in the rise of support for non-establishment political parties across Europe, the emerging political impact of the economic and social deprivation felt by many areas which have lost traditional economic activities to either Eastern Europe or Eastern parts of the globe.
The flip side of this is greater prosperity for more people in more parts of the world than at any time in human history. As recently as 1990 ,only a fifth of the world's population had the financial capacity to make discretionary purchases beyond their most basic needs yet by 2025, an estimated 53% of the world's projected population will belong to the so-called 'consuming classes'.
b) Digital Revolution
Driving much of this economic convergence is, of course, the digital revolution we are living through which I see impacting the insurance industry - like so many other sectors - in two quite different ways. On the one hand, it allows us to do what we already do but faster and to a more sophisticated degree; whether it is modelling risk to underwrite annuities or homes, processing claims or responding to customer queries. The more fascinating area is the extent to which it allows us - and non-insurer competitors - to do entirely new things in a world where connectivity increasingly becomes a way in which we exist and function rather than something we manually opt into. For example, this allows insurers using smartphones as telematics devices to help track driving or fitness performance and suggest optimising tips. It may also allow the smoke alarms of the future to be mini-hubs which monitor your home while away and help you minimise risk by alerting you to problems when you are away.
c) Ageing
The third element of our changing world which I wanted to highlight seems on the face of it, more simple; our ageing society. We all know the core proposition; there are more of us, we are all living longer and there are fewer working people to support the ever-growing number of retirees. Yet, we are still all fumbling our way to what this actually means; the economic and political realities of countries that are older, the viability of our existing savings models and the sheer impossibility of meeting these changes through modest incremental reforms to structures built for fundamentally different demographic and asset distributions.
Fit for Future
So what future does this take us to and how 'fit for the future' are we? Well, 'fit for the future' is one of those phrases that is easy to use but challenging in practice particularly when much of what is being labelled as 'the future' is already with us and when being genuinely prepared for what lies ahead is not just the same as 'doing something'.
For me it involves several key components.
a) Developing a macro strategy
The first of these is macro-strategy. Namely having a sense of where business could go over the next two decades, not just the next three years. This poses hard questions for insurers and long-term savings providers who know full well that it is not a given that they will have a core market role to play 20 years from hence as disruptors eye up the market and customer allegiances are weakened by new technology and political and regulatory interventions. Although it is less interesting, I would add the same consideration goes for trade bodies such as the ABI. We have no right to exist and nor do our members; we all have to earn a future, in part, by having thought about how we can offer value two decades from now to those who could buy our services.
Key to this is data technology of course. None of us can pretend to know what the future can bring, no more than anyone predicted in 2007 how quickly the smartphone would dominate the market. (And certainly not many people of my age whose computing education at school was queueing up to use a ZX81 - or a Spectrum if we were lucky.) But we can be open to know that permission levels for data-driven digital technology will shape our future and we have to embrace this, not just try and make compatible what we want to do anyway. This means having the permission levels on use of data set in ways which customers are already comfortable with and see value in, rather than something which is forced on them.
b) Consumer-centric
Which brings us to consumers. To be fit for the future, we have to be an industry that is as transparent with our customers as is possible in a competitive environment, especially on areas such as data use where they are instinctively suspicious. But we have to be more than open, we have to be interactive and responsive, especially with customers who will have grown up using social media as their mother tongue when it comes to engaging with service providers. The lack of excitement which is always likely to accompany the purchase of an insurance or savings product has to be compensated for by an experience as user-friendly as any available commercial transaction and we have to be prepared to fight tooth and nail with regulators where necessary to be able to achieve this.
c) Delivery
Finally, to survive and thrive in the future, we have to be as effective as possible in doing what we do. The more we can pay claims quickly, deliver innovative general & commercial insurance and long-term savings products that people and businesses need, the easier we will find it to navigate the challenges it is more difficult to foresee.
Opportunities
Emerging Risks
Innovation will be critical because meeting the Emerging Risks of our fast-changing world will be critical to maintaining and enhancing the economic strength and potential of our industry. For commercial lines and London Market insurers, Cyber poses the single biggest insurance opportunity and challenge; it already poses a significant threat to businesses, individuals and commercial infrastructure and this can only grow as the digital revolution unfolds further. Yet we have been here before; 100 years ago the insurance sector was responding to the advent of the Motor car and the aeroplane in a world where transport had previously been dominated by ships and horses. By responding successfully to those challenges, the insurance industry positioned itself for the 20th century. With cyber, it needs to do the same for the 21st.
Other emerging risks of note that provide commercial opportunities are the reduction of the size of the state - a trend across Western governments, not just in the UK - as governments pull back from areas of welfare protection and state insurance provision. To this, we should add greater Cat Risk as globalisation sees more wealth and commercial assets concentrated in areas of the world more prone to natural catastrophes. As these emerging markets grow, so does the appetite for the more sophisticated types of insurance and reinsurance the UK and European industries still excel in. But there is no room for complacency and the excellent London Market Group report led by Steve Hearn of Willis demonstrates the London Market's appetite to develop its proposition for the emerging and already emerged economies that are some distance from our shores.
Growth in Assets and Wealth
As large parts of the world get richer, more of its citizens need the types of long-term savings and investment products which the UK excels in. Again, we have a natural position of strength here with some of the most sophisticated and important long-term savings and investment companies in the world operating from the UK. Clearly the challenge/opportunity at the forefront of many firms' minds is that posed by the new freedoms introduced in the UK. But it is not hard to see that the debate in the UK is also happening in many different markets around the world; indeed, some like Australia, are having a comprehensive look at their retirement income system having reformed it twenty years ago. Wherever there are ageing citizens who are above the poverty line, the wish to protect against running out of money, have care options for later life and have choices to take lump sums of cash in a tax-efficient way will be present and demanding market solutions. With the right regulatory framework and a degree of political certainty, providers stand ready to engage fully in this market.
Partnership with Government
Which takes us to working with governments. When my predecessor, Otto Thoresen, spoke here a year ago, the media picked up his reflections on the impossibility of ever reaching an equal partnership with governments. He was right to do so and draw on the ABI's extensive experience in recent years of working closely with ministers and officials to develop the Flood Re public-private partnership, implement the Chancellor's Freedom & Choice reforms and achieve a workable Solvency II framework. Yet however difficult the path, it is still one which the industry must continue down, both to maximise its economic and social impact but also to realise business opportunities on both the general insurance and long-term savings sides of the industry. Whether on meeting the protection gap, tackling an ageing society, adapting to climate change, developing infrastructure investment, ensuring the affordability of insurance, supporting business development and growth and many more, the insurance industry has a vital role to play in working with government to meet the needs of our society and economy. Sometimes, the relationship involves public arguments, prodding and cajoling on both sides and often a fair degree of mutual irritation and suspicion. All true. But so is the undoubted power for the public good and commercial opportunity for insurers and the economy and society we serve in making the partnership work, most of the time on most of the issues.
Challenges
Political Risk
Whichever governments in whatever country we are trying to work with, it is nonetheless striking that political risk is one of the main challenges facing our industry, especially in the UK.
This risk can take the form of market interventions as with price controls for workplace pensions introduced by the last Government and its setting up of a State-backed captive to compete with the market in the provision of insurance to academy schools. More widely, it can come if global tax initiatives like the Base Erosion Profit Shifting (BEPs) work ends up producing unintended consequences when addressing the lack of fairness in aggressive tax planning and corporate tax avoidance.
But for us in the UK, the real political uncertainty for our sector comes from the dual and interconnected possibility that the UK could leave the EU and that the UK could dissolve if Scotland voted to become independent. Even five years ago, the likelihood of both would have seemed far more remote than they do now and so we certainly cannot be complacent. The insurance and long-term savings industry collectively chose not to engage with the Scotland vote last September although many of its leading players, such as Standard Life set out clear public positions in favour of the UK which were echoed by CEOs of leading companies such as Aegon, Aviva and Prudential. On the EU referendum, the industry will be under pressure to have a collective position and I would certainly expect this to feature heavily in ABI discussions over the coming months.
Reputation
But we can only engage in public policy debate effectively if we are also demonstrably tackling some of the issues which continue to bedevil our reputation. There are understandable reasons why we struggle to achieve the standing among our customers we would like; insurance and savings products are non-exciting purchases which can often be rarely used or can only demonstrate benefit decades down the line. The highly regulated nature of the customer interface can limit interaction and help and all too often result in the worst kind of boilerplate language in customer-facing materials. And as capital-reliant businesses which are acutely sensitive to legislative and political frameworks, the impacts of policies such as QE (however justified in overall macro-economic terms), bloated civil justice legal costs and constant pension relief tax changes can all too often mean higher prices and more change for customers than they want.
That said, there is much still in our hands to improve our reputation and under the ABI's Chairman, Paul Evans, this is a top priority for our main policy-making bodies for the industry. . There is no single measure that can improve the industry's reputation but among the areas most important are:
- Transparency about payment of claims; we need to be more open with customers with data about how many claims are paid, not just the overall amount.
- We need to work ever closer with regulators in the UK and EU on how to make customer communication as simple as possible, especially in an increasingly digital environment.
- We need to establish better permission levels for how we use data so we can work closely with innovators to help develop the insurance and savings experience.
- We need to be clearer about how insurance distribution works and what value is added by each part of the chain in as transparent a manner as possible.
Insurance and savings are products built on trust - so we always have to be prepared to go the extra mile to demonstrate good faith, not just the letter of regulatory practice. In recent years, the ABI's members have done this through voluntary codes on the use of legal firms in Road Traffic accidents and through the voluntary audit of legacy workplace pension schemes carried out after the OFT inquiry. We have to go further if we are to win back trust and demonstrate that this is an industry that is much better at serving its customers than those customers too often believe.
Regulators
But none of this can be done without working closely with regulators here, in the EU and increasingly, internationally. But it is also here that some of our most formidable challenges remain.
Advice Gap
The advice gap created in the UK by the otherwise laudable RDR reforms has become an even more acute problem with the introduction of the Chancellor's Freedom & Choice changes. I have no doubt that a range of players in the wider market would like to serve customers seeking advisory help that went further than the Government's PensionWise guidance. But for innovation in the market to happen, we need the FCA to re-examine whether the current distinction between full advice and provision of information offers the optimal solution for customers. We don't accept this is a medium-term issue, it is a now issue and it requires leadership from our regulators if it is to be resolved. We are committed to working with them to work towards a solution but it has to be led by regulators, not the market, given the consequences for providers and their customers if they were to experiment in ways that were subsequently challenged by regulators or the courts.
Conduct
More widely, insurance and long-term savings providers in the UK and EU look to their regulators and question how much further the conduct agenda could go; a pertinent issue in the EU where EIOPA has demonstrated a much greater appetite for conduct issues than a reading of its remit might suggest would be the case.
In the EU, as in the UK, the central question remains how far regulators are prepared to balance customer exposure to risk against return, and how far regulators are prepared to allow more easily communicable materials to replace more legalistic 'belt and braces' documentation. I hope in both debates, we can find a balance and listen to customers themselves about what they want, as well as continue to have an open mind to what behavioural economics science is increasingly telling us.
Capital
Finally, it would not be appropriate to finish a brief overview of regulatory challenges without mentioning capital and Solvency II. The obvious challenges are how conservative our domestic and EU regulators will seek to be in the approval processes playing out over the coming months and in their final framing of areas such as the Fundamental Spread which can still make a big difference to the outcome. It is far too early to say either way but it will remain important that in the judgements they bring to bear, regulators are true to the spirit of the agreement reached which sought to balance appropriate capital levels with the need for insurers to be able to contribute fully to economic growth and prosperity.
But Solvency II is not the only game in town - so is the proposed International Capital Standard (ICS). We have been vocal on the need for this to be developed gradually and in a way compatible with Solvency II rather than in competition to it. My colleague, Hugh Savill, the ABI's Regulation director, leads the global insurance trade body work on this issue. And on this it seems we are making progress with the IAIS itself, the European Commission and the European Parliament all making clear at the Insurance Europe conference in Luxembourg last week that the priority had to be to get Solvency II working before any serious attention could be given to the ICS.
Conclusion
So to conclude, I hope this brief tour d'horizon of the changes facing our industry and the opportunities and challenges it brings demonstrates how much there is to engage with and potentially shape.
I would argue commercially the sector is in a strong position but not impregnable. In such fast-moving times, it would not be easy for completely new entrants to the market to deliver the range of services insurers and long-term savings providers do, but it would be much easier to pick off some elements - as the price comparison websites have already done in the GI market.
What is unarguable is that all parts of the market need to continue to embrace the future, not at the pace that is comfortable for us, but at the speed being dictated by customer expectation, digital advances and regulatory and political expectations. To shape the public policy and regulatory aspects of this, the industry has a whole needs to be as cohesive as it can be, to amplify its voice on issues where it needs to speak up, to strike a good deal when it is partnership with government and to maximise its benefit to the economies and societies of Europe which is often its best defence against undue regulatory or political interference.
In doing this, we need to be realistic about what we can achieve; dogged determination is probably more valuable than lofty aspiration and continue to do all we can to frame our thinking and delivery from a customer-centric position.
Above all, we need to maintain our permission to operate; a curious modern alchemy of regulatory approvals, political consent, reputational hygiene and customer-focused products. We all need to earn our right to a future in this rapidly-moving world of ours and I am determined the ABI will play our part in helping our great industry achieve one.