8 June 2016
Building the reputation of the general insurance market
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Introduction
Good morning. Thank you for that introduction and for the invitation to be with you today.
Tomorrow I am moving house. When I left home this morning, I walked past boxes of books, pots and pans and suitcases full of clothes that are all ready for the movers tomorrow morning. They say that moving is one of the most stressful of life’s experiences and I can certainly understand why. In addition to getting the broadband moved and ordering furniture, over recent months, we’ve had more than our fair share of exposure to estate agents. Some have tried to sell my wife and I a house that is completely at odds with the brief we provided, some have known next to nothing about the house they have showed us and it is apparent that some have little to no understanding of the market in which they work.
It is no wonder that estate agents are some of the least trusted people out there. Sadly, similar allegations are sometimes made against the insurance industry with inappropriate cover being sold by those with little understanding of their customer. So my remarks today will explore why the reputation of the general insurance industry is so low amongst consumers, the media and politicians, down there with the reputation of estate agents; what we at the ABI are doing in an effort to address this; and some of the future reputational challenges for the general insurance market that I see on the horizon.
The industry’s reputation – the status quo
Let’s start on a positive though. Although the facts on the role of insurance in the UK economy may be familiar to this audience, they are less well known by the general public. It’s worth reminding ourselves and celebrating the fact that:
- The UK insurance industry is the largest in Europe, the third largest in the world and employs over 300,000 people;
- The insurance industry contributes £35 billion to UK GDP; insurers manage investments of £1.8 trillion and pay £12 billion in taxes to the Government; and
- General insurers pay out £64 million every day in claims.
But none of this can be taken for granted. In 15 days, the public will vote in a referendum on the UK’s membership of the EU - one of the most important decisions the country will make in a generation. Our membership of the EU guarantees the right to do business in 27 other Member States on an equal footing. This enables the UK to sell more in insurance and long-term savings products to the rest of the EU than they sell to us. Make no mistake about it, the UK insurance industry benefits from Britain’s membership of the EU and the implications of a Brexit for the UK’s insurance success story have been clearly set out by industry leaders.
Away from the high stakes of the Referendum, there are high stakes for us as an industry in terms of our reputation with customers. Recent reports quantify the scale of the public’s mistrust of insurers:
- The CapGemini World Insurance Report indicated that only 31% of customers feel that they have a “positive experience” with insurance;
- Deloitte noted that 30% of customers found it complicated to understand different types of insurance policies; and
- Ernst & Young found that 53% of consumers have complete or moderate trust in insurance. That may sound positive. But when the same survey found that 55% of consumers had complete or moderate trust in banks, there is more than cause for concern.
In fact, all these reports make for depressing reading. But the figures are in stark contrast to what I see on a daily basis and with which many of you will be familiar. Across the UK, tens of thousands of dedicated men and women work hard on a daily basis to deliver a great insurance experience for their firm’s customers. But the industry cannot ignore the poor feedback insurers receive.
The role of the ABI
As an industry we need to get real. People enjoy a good meal, their latest iphone or a relaxing holiday. Noone enjoys buying insurance. Consumers purchase many general insurance products hoping never to actually use them.
I don’t think we will ever overcome consumer resistance to the “grudge purchase” mentality. So if no one is ever going to enjoy buying insurance, as an industry we need to make sure customers can access the best insurance deal; ensure that the premium offered is fair and transparent; and make sure that the insurer is there in the customer’s time of need. Fail on any of these counts and as an industry we fail to demonstrate to customers the benefits of the highly competitive general insurance markets that exist in the UK. And we fail to improve our reputation as an industry.
A big part of my role at the ABI is working with the CEOs of the UK’s general insurance companies to help address some of the political, regulatory and media challenges that the industry faces. Talking about improving the industry’s reputation is easy. Taking action is more challenging. Helping insurers to deliver good customer outcomes underpins all of the ABI’s work. But a number of market-led initiatives launched over the last 12 months are particularly important in seeking to build customer trust and confidence in our industry.
I could talk about the industry’s work to facilitate the roll-out of autonomous vehicles; our work to increase SME understanding of the importance of cyber insurance; the collective fight against insurance fraud; our work in insurance fintech; or seeking to tame the compensation culture. But over the next couple of minutes I wanted to pick out a couple of initiatives that the ABI has led with a view to improving the industry’s reputation – how we are helping those at greatest risk of flooding with the establishment of Flood Re; how we are helping vulnerable customers; and how we are shining the light of transparency onto the general insurance claims process.
The establishment of Flood Re
One of the most transformational projects that the ABI has led over recent years has been the establishment of Flood Re.
Flood Re is a world first reinsurance scheme that will enable around 350,000 householders who live at flood risk to access affordable home insurance. It follows years of negotiation with Government, the passage of primary legislation to enable its establishment, obtaining £2.1 billion in reinsurance cover and securing regulatory authorisations from both the Financial Conduct Authority and the Prudential Regulation Authority. Tens of thousands of hours across the industry were dedicated to the successful launch of Flood Re on 4 April.
So why have we bothered? With better flood mapping and risk reflective pricing, couldn’t the industry have simply allowed those at high flood risk to be priced out of the market?
The answer is yes, we could have. But that was never a viable option. As an industry, we had to do something to help the UK face up to the challenges of the biggest nat-cat risk our country faces, a risk that is only going to get worse as the effects of climate change become more pronounced. Working with the Government, insurers have made a hugely important contribution to one of the biggest public policy challenges of recent years. And those customers at flood risk are starting to reap the benefits as insurers start to cede policies to Flood Re. Customers who previously faced huge flood insurance excesses or extremely high premiums are now starting to access affordable flood insurance, some for the first time.
Vulnerable Customers Code for Renewals
Although Flood Re has taken up significant industry resource and grabbed the headlines, there are other important projects the ABI has been working on to improve consumer outcomes.
In January, the ABI launched a Vulnerable Customers Code for Renewals. It addresses the concern that vulnerable customers might lose out by simply renewing their motor or home insurance policy without first checking that they are getting the best deal. Under the Code, insurers and brokers will need to ensure that their staff are trained both to identify and understand potentially vulnerable customers and to offer flexible options to address those customers’ needs. The Code is permissive not prescriptive. Insurers and brokers will determine for themselves how best to identify those customers who might be vulnerable and how best to respond to that vulnerability. After all, it is insurers and brokers who understand their customers best, not their trade associations. The industry is preparing for the commitments that the Code will bring and the ABI will produce a report early next year assessing the Code’s influence and impact.
Increasing transparency
It is not just on addressing consumer vulnerability that we have been seeking to improve the industry’s reputation with customers. We have been trying to make the general insurance market more transparent to customers. Transparency builds trust; and increased consumer trust should improve our industry’s reputation. We’ve been seeking to increase transparency through three key initiatives.
Firstly, we have long argued that on home and motor policy renewals, insurers should be required to disclose the premium the customer paid last year. This should address the concern that some consumers pay higher premiums if they fail to shop around. In July 2014, the ABI wrote to the FCA proposing that all firms be required to disclose this information. A year and a half later the FCA consulted and we hope that, two years after we first proposed it, the FCA might deliver the necessary reform to improve customer outcomes and transparency. And it is the FCA that needs to deliver this in order that there is a regulatory level playing field between all distribution channels in the market.
Secondly, we are seeking to be more transparent in terms of the premiums consumers pay. Since 2014, the ABI has collected data from the industry and, on a quarterly basis, we have published average home and personal motor premium trackers. Ours are the only premium trackers that show what customers actually pay for their insurance as opposed to an average of what they are quoted. Having made the decision to be transparent with consumers, we have to take the good with the bad. Having reduced over recent years, average motor premiums have started to go up again. The transparency that comes from increasing premiums shows customers the effect of the Government’s successive increases in Insurance Premium Tax and indeed that more needs to be done to address our compensation culture.
The third transparency initiative we have launched relates to claims success rates. There is a public and media perception that insurers try to wriggle out of playing claims. So we analysed 7 million claims made between 2013 and 2014 and published both the claim success rates and the average claim pay out for private motor, domestic property and travel insurance policies. We found that in private motor the claims success rate was 99% and in travel it was 87%. But this transparency initiative was not simply some collective industry back-patting exercise. In home insurance we found that the claim success rate was much lower at 79%.
Having analysed why the rate was lower, we have done something about it. Next week, the ABI will be launching a new consumer guide to home insurance. It will set out what home insurance is; what it covers – and more importantly what is not covered; how the premium is calculated; and how to make a hassle-free claim. This will be the latest in our proactive, consumer-centric campaigning work and improving the industry’s reputation is an important underpinning of it.
Reputational challenges of the future
So having set out the work that the ABI has been undertaking to increase the industry’s transparency and improve insurers’ reputation, it is worth reflecting on some of the challenges of the future that may undermine the positive work undertaken to date.
I could talk about the risks associated with the “fairness” of insurers’ use of some rating factors; the challenges associated with the use of data in both underwriting and claims; or difficult customer journeys in purchasing our products. But I have chosen three other challenges of the future. They are in no particular order and aren’t necessarily the top three reputational challenges facing the sector. But they are worth us all reflecting on.
Flood insurance for SMEs
The first links back to the challenges associated with flooding that I discussed earlier. The flooding experienced across the country in December and January had a particularly severe impact on commercial property. This has increased political and media attention on flood insurance for businesses, especially SMEs, and has led to misdirected calls for Flood Re to be rebuilt to accommodate commercial property risks rather than only covering domestic property.
This is neither the time nor the place to rehearse all the arguments as to why that would be a bad idea. Suffice it to say that delivering affordable flood insurance for business is a different problem which requires a different solution. And it is that solution, whatever it may be, that poses the potential reputational challenge for the future.
Let me be absolutely clear: the industry accepts that some businesses find accessing affordable flood insurance a challenge.
And business will have a role in responding to that challenge, along with Government and the insurance industry. There are a whole range of options that will need to be carefully considered, including targeted assistance for business to implement flood resilience; Government backed support for those not able to access insurance; and the commercial scheme under development by our colleagues at BIBA. Whatever the solution, clear, consistent and careful communication will be needed across the market. Consumers, politicians and the media see no distinction between broking and underwriting – it is all just insurance to them. So the industry will need to be careful not to over-promise and under-deliver. Fail to do so and there will be another reputational issue for the industry to manage.
Legacy IT infrastructure
The second potential reputational headwind of the future relates to the industry’s legacy IT infrastructure. And by industry, I don’t just mean insurers. On many occasions in recent years the industry has flagged that it’s legacy IT systems mean they cannot implement change in a timescale that regulators want. Implementing the outcomes from the CMA’s investigation of the private motor insurance market and accommodating the Chancellor’s recent increases in Insurance Premium Tax spring to mind as recent examples.
I see legacy IT as a both a regulatory and reputational challenge of the future. This legacy means that the insurance industry is increasingly seen as a blocker to the delivery of regulatory change seeking to improve customer outcomes. The industry is actively promoting the uptake of cyber insurance to increase the resilience of UK plc, but at the same time it is operating archaic IT infrastructure, potentially prone to cyber attack. The ineffectiveness of the IT interface operating between insurer, broker, price comparison website and software house could lead to insurers writing risks that they otherwise wouldn’t. Alternatively, insurers might write the business but at a price that does not accurately reflect the risk.
None of these scenarios is a good place for the industry to be. At the risk of sounding like Bob the Builder, yes we can fix this. It won’t be cheap or easy but the industry has got to continue to make the necessary investment to its IT infrastructure. Fixing yesterday’s problems today only stores up further problems for tomorrow. So in addressing its legacy IT, the industry would be wise to ensure new systems are resilient to the consumer needs of the future, offering a seamless interface between the internet, voice, text and social media along with traditional communication channels.
Transparency of broker remuneration
The third area of future reputational challenge is the potential for conflicts of interest to exist in the intermediation chain. In a world where SME customers are treated in a similar way to personal lines consumers from a regulatory perspective, in my view, it is only a matter of time before the FCA starts to ask questions about the transparency of broker remuneration. All the more so following the Supreme Court’s decision in Plevin and having asked similar questions of the distribution landscape in the life insurance market in the context of the Retail Distribution Review. In a well-functioning market, service providers compete on the price and quality of their offering. They are not inappropriately influenced in providing advice based on the payment of commission. The question for debate is whether there is a well-functioning market in the distribution of general insurance products.
The response from brokers, of course, is that the FCA’s rulebook already requires disclosure of commission on request for commercial customers. That may be so but as with so many things in life, there is the principle and the practical. Are commercial customers aware that they can request disclosure and do they do so in practice? Is it right that the burden is on the customer to ask rather than on the broker to disclose upfront? And if brokers have nothing to hide from their customers, then what is the problem with increased and proactive transparency? These are not really questions for me to answer. But in the context of a discussion on the regulatory and reputational challenges of the future, it is impossible to ignore the GI distribution landscape.
Conclusion
So in conclusion, with so many negative headlines about the general insurance market, it is sometimes easy to forget the fantastic contribution our industry makes to both the UK economy overall and to helping our customers when they need us most. There is much to be proud of in terms of the work that we as an industry have done to improve consumer understanding of our sector.
Tomorrow morning when the movers arrive, I won’t be thinking about estate agents – I hope not to think about them again for a very long time! And to be honest, tomorrow I won’t be thinking about the reputation of the general insurance industry either.
But when I’m back in the office on Monday, it will be back to business as usual. Increasing transparency in general insurance, working to increase consumer trust in our industry and the reputation of the market overall. No one is under any illusions. There is a long road ahead, but we have to continue the journey we’ve already started. So, as an industry, let’s get on with it.
Thank you.