[Check Against Delivery]
Keynote Address by James Dalton to the Plexus Law 6th Annual Property Risks and Damage conference
16 May 2018
Introduction
Good afternoon. And thank you for that introduction.
I have been asked to provide an overview of the property insurance market and some of the ABI’s property insurance policy priorities over the next 12-18 months, which, of course, I am happy to do. But I want to put those policy priorities into a broader context of the work that we are doing to improve customer understanding of how our market operates.
What is the ABI and what do we do?
But first, I am conscious that some of you may be unfamiliar with the ABI and what it is that we do. The ABI is the voice of the UK’s insurance and long-term savings industry. With over 300 companies in membership, our 100 staff of policy, regulation and advocacy experts represent the views of the sector to politicians and policy makers here in the UK, in Brussels and across the world; we represent the sector in the media and we get the right people together to help inform public policy debates. In recent years, we have also launched an Associate Member programme to ensure that our members and their wider supply chain and partners are able to meet to discuss issues of mutual interest. There has been a significant take up of this opportunity by law firms specialising in insurance and I hope that we will soon be able to welcome Plexus as an ABI Associate Member.
The UK property insurance industry is a success story and has much to be proud of. An important part of the ABI’s role is to tell the story of how property insurers help businesses and homeowners to manage risks to their assets and how insurers help their customers recover should the worst happen. To continue doing that, the ABI seeks to deliver a claims and underwriting environment that works for consumers and we seek to influence the public policy and regulatory environments to respond to the future challenges facing the industry.
The Value of Property Insurance
In 2016, property insurers paid out £4.7 billion in claims – almost £13 million per day. That’s split by around £7.4 million in claims per day to households and around £5.5 million per day in commercial property insurance claims.
Property claims costs continue to cause concern, even with the relatively benign weather we have seen over the last couple of years. The ABI’s property claims statistics for Q4 2017 show that the total cost of claims incurred was £903 million from 300,000 claims. Domestic escape of water claims remained at £160 million for the quarter and business interruption claims are the highest they have been since the first quarter of 2016.
Trust and transparency
The significant value a well-functioning property insurance market adds to the overall economy can so easily be over-shadowed by practices or events which undermine consumer trust in the industry. Insurers are never going to overcome consumer resistance to the “grudge purchase” mentality. This applies equally in personal or commercial lines property insurance. 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 painlessly; ensure that the premium offered is fair and transparent; and make sure that the insurer is there in the customer’s time of need. That’s what customers expect.
A big part of my role at the ABI is working with the CEOs of the UK’s general insurance companies to help address the issues that undermine consumer trust in our sector and improving the industry’s overall reputation. Talking about improving the industry’s reputation is easy. Taking action is more challenging.
But taking action is exactly what we have done over recent years. Transparency builds trust; and increased consumer trust should improve our industry’s reputation. So we’ve been seeking to increase transparency by:
- publishing our quarterly home insurance premium tracker which shows the average premium paid by customers. We published the latest tracker on 8 May which showed a continuing fall in the average premium for combined buildings and contents insurance to £295 – the lowest level on record
- publishing claims success rates in motor, home and travel insurance to counter the public and media perception that insurers try to wriggle out of playing claims
ABI-led action
This transparency has been complemented by specific actions that have sought to improve customer outcomes, especially in home insurance. These include:
- proposing that the Financial Conduct Authority should require disclosure of last year’s premium at the point of renewal. This was implemented by the FCA in April 2017.
- In 2016 we launched a Vulnerable Customers Code for Renewals which addresses the concern that some consumers might lose out by simply renewing their policy without first checking that they are getting the best deal. Under the Code, insurers and brokers 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. Our implementation report published last year showed good practice being implemented across the market which will, of course, continue to evolve.
- Also in 2016, we published a new consumer guide to home insurance which sets 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.
- Last year we launched our “Insurance Experiments” campaign which is a fun and engaging way to explain some of the key concepts of property insurance in short animations which we have been promoting through social media. For an industry that is traditionally a bit “small c” conservative, it’s quite a different way of communicating. We will be releasing further animations later this year.
Guiding Principles and Action Points
And last week we took the latest step in our journey of improving customer outcomes when we launched our new Guiding Principles and Action Points on Renewal Pricing in General Insurance. The issue of renewal pricing and “loyalty penalties” is not unique to the insurance market. Indeed, charging loyal customers more than new ones is commonplace in TV, broadband or energy contracts. So we are proud of the fact that it is insurance that is the first sector to have taken positive, industry-led action to seek to address this problem. The fact is that the market works very well for people who shop around at renewal to get the best price for the insurance they need. But there is a flip side. Those who fail to shop around can pay higher premiums. There is no easy solution to this. Competition law rightly requires insurers to compete to offer customers the best outcomes rather than sharing and coalescing around a similar approach. First mover disadvantage also means that one firm acting unilaterally would face significant commercial challenges.
So the Guiding Principles and Action Points jointly agreed between the ABI and the British Insurance Brokers Association will address excessive differences between new customer premiums and subsequent renewal premiums that unfairly penalise long-standing customers. The clear objective is to see a marked improvement in the outcomes for long-standing customers. And we don’t just expect scrutiny of their success, we are actively seeking it. Not only will we do it ourselves through a progress report in two years’ time, we are also inviting the Financial Conduct Authority to take the Principles into account when supervising firms. The impact of the Guiding Principles will be neither uniform nor immediate, but I do think we have taken an important step towards addressing one of the negative consequences of a highly competitive insurance market.
Priorities for 2018
So against that backdrop of the work we have been doing to improve trust and transparency in the property insurance market, I thought it might be useful to spend a couple of minutes setting out the ABI’s property policy priorities for 2018.
Flooding and natural catastrophe
For many years, the ABI has led the industry’s approach to responding to major floods. The establishment of Flood Re has delivered on the industry’s objective of improving the long-term availability of affordable flood insurance and in doing so, insurers have made a hugely important contribution to one of the biggest public policy challenges of recent years.
But Flood Re is not a solution to the problem of flooding and flood risk. There are an estimated two million homes in England that are at risk of river or coastal flooding, with an additional 2.4 million homes at risk of surface water flooding. The number of properties at risk is only increasing in the context of climate change and the limited Government investment in flood defence infrastructure. When you combine that with the fact that Flood Re has a limited lifespan of 25 years expiring in 2039, more needs to be done now to think about what a risk reflective flood insurance market looks like for the next generation. A key challenge will be how we can win the argument with customers on the importance of resilient repairs and wider resistance measures. I don’t have the answers, but we need to work with our partners at Flood Re and in Government to ensure that, in the context of other policy priorities and short term political thinking, the flood insurance challenge of the future is not forgotten.
Escape of water
Escape of Water claims continue to be the most consistently expensive peril for domestic property insurers. It is a problem that, in some senses results from the housing crisis. As the price of homes increase, when combined with the cost of stamp duty, it makes staying put and investing in your current home an attractive proposition for many people.
This has driven a dramatic increase in the amount of water flowing around a property in increasingly complex plumbing systems: from more plumbed-in appliances in the home; more properties with central heating; and more ensuite bathrooms and downstairs toilets.
This doesn’t just mean more claims, it means more expensive claims resulting from:
- Hidden or integrated pipework which means leaks aren’t immediately discovered, increasing overall damage;
- The construction methods and materials in modern homes are less resilient to damage, for example, higher spec kitchens, more laminate flooring and more media equipment built into walls and ceilings;
- Some insurers are concerned around unnecessary strip out and removal of items
Many of these we can’t do much about but changes in the way claims are managed will help. Communication between various supply chain professionals, damage management firms, insurers and the customer is key. And it is incumbent on all those involved in the claims and restoration chain to work with insurers to improve understanding of stubbornly high Escape of Water costs.
Fire
Two years ago, was the 350th year anniversary of the Great Fire of London and it was a great honour for me to be invited by the Worshipful Company of Firefighters to deliver the Annual Fire Lecture. In that speech, I questioned whether, in the 21st Century, we still had lessons to learn from a major fire event that took place in 1600s. I reiterated the industry’s call for improved property-level measures to protect the most vulnerable in society from the dangers of fire; I questioned the historic approach to building control which focussed on deregulation rather than a risk-based and proportionate regulatory framework and predicted that it would take a tragic loss of life and a public outcry before something changes to require the mandatory installation of fire sprinkler systems.
Unfortunately, in June last year that tragic loss of life occurred in the horrific events we witnessed at the Grenfell Tower in West London.
Make no mistake about it: Grenfell represents a systemic failure of the entire building control system. Although much of the media and political focus following Grenfell has been on cladding systems, it has been positive to see the numerous Government reviews into what happened examining the broader issues with the building system that have been identified.
The insurance industry is playing our part in an effort to ensure that decision makers have the detailed, technical information available to make informed policy decisions. We have commissioned over £250,000 worth of research into the fire performance of external cladding systems, the use of automatic sprinkler systems in high-rise residential buildings and the potential for high-integrity alarm systems to improve detection, response and evacuation.
We recently published the findings of the technical research on cladding, which received widespread press coverage around our call for the testing procedure to be improved. The results highlighted the inadequacies of the BS8414 test regime not replicating real-world conditions. This includes not considering the 20% of plastic within buildings that increases the size of the flames, testing that doesn’t take account of vents and ducts within cladding installations, and the performance of cavity barriers in these scenarios. This ‘fresh-eyes’, non-product-specific study, demonstrated potentially major shortcomings in the 8414 test regime. Those potential shortcomings mean that the test may not deliver the level of fire performance assurance that is currently inferred from its use, and that it may fail to deliver data in a form that is appropriate for use within desktop studies. We have submitted this evidence to MHCLG, Dame Judith Hackitt and the independent review team, the BSi in respect of the adequacy of the BS8414 test regime and the Grenfell Public Inquiry.
In addition to finalising the research we have commissioned on sprinklers and fire detection, we are anticipating Dame Judith’s final report will be published later this week and, like many of you, we will be reading it with interest.
Modern Methods of Construction
The final policy priority we are focussed on covers the issues raised by Modern Methods of Construction (MMC), including the particular use of timber frames, prefabricated and modular construction.
The Government has a clearly articulated objective to build 300,000 new homes a year by the mid-2020s. The use of MMC to construct these homes is likely to feature prominently so we are working with the Government and the construction industry to ensure that homes built using MMC are resilient to future perils and can be maintained in a way that enables their owners to access affordable insurance for the lifetime of the property. This can include looking at the level of combustible materials and fire safety of new buildings, reducing the risks of escape of water where possible, and building in the right places to not add to the residual flood risk, as well as ensuring the quality of the materials, components, construction, and ongoing maintenance. Some of these issues will pose challenges for the future, so we need to lean into them now in order to minimise their impact both on the industry and our consumers.
Conclusion
In conclusion, I hope in these short remarks I’ve been able to provide you with an overview of the state of the UK property insurance market and some of the challenges that we are working to address both from a conduct and property policy perspective.
Its important to recognise that we all operate in an environment of competing public policy imperatives. Ministers are seeking to build more homes, more quickly to address the national shortage of houses; they are seeking to achieve a more environmentally sustainable economy, they are endeavouring to reduce regulatory burdens on business and the Government has said that they want to ensure that the lessons of Grenfell are learned.
How the balancing of these competing policy priorities will play out in practice remains to be seen. Rest assured, however, that the ABI will be continuing to make the case to decision makers across the UK and society at large about the importance of making both people and buildings more resistant and resilient to the perils they face so that we have a built environment fit for the challenges of the future.
Thank you.