Introductory remarks
I would like to thank Minister Isola for inviting me to be here at the Think Gibraltar insurance breakfast. I have been very fortunate in my role as ABI Director General to work with the Gibraltar Government and meet Minister Isola on various occasions over the last five years, including earlier this year in June. Our strong working relationship is a reflection of the significance of Gibraltarian insurance within the UK market – 1 in 5 cars on UK roads are insured by a Gibraltarian insurer as the Chief Minister pointed out on Tuesday.
The ABI has 22 Gibraltar-based firms in our membership and we have established a close working relationship not only with our members but also the Gibraltar Insurance Association (GIA) and the Gibraltar Financial Services Commission (GFSC).This is not a one-way relationship. The team has travelled to the Rock three times this year, and their feedback from these trips demonstrates the breadth of different business models and approaches within the Gibraltar market. I’ve also noticed that they did not forgo the opportunity to get a healthy tan and staying in a nice hotel!
The ABI represents the UK’s world-leading insurance and long-term savings industry and our 250 member companies provide peace of mind to businesses and families across the UK. Our role is to be the voice of the sector, promote the value of its products and highlight its importance to the wider economy.
As the market continues to evolve, the ABI as an organisation changes to meet the needs of an increasingly complex and diverse insurance landscape. We need to change too. While our focus as an organisation will always remain on championing our world-leading insurance sector, we recognise that to do this, we must work with a growing network of specialist service providers, innovative data and InsurTech firms, legal experts and intermediaries. To complement our long-standing associate membership offering, we launched an MGA membership proposition to cater for a part of the market that is bound to become more important over the coming years. If you are interested in exploring options for working together with the ABI, feel free to speak to me afterwards, or get in touch with our membership team.
Strategic issues facing the industry
Brexit
As with many of our members, Gibraltar insurers will have been going through the process of restructuring their operations to ensure they can still service customers within the EU in the event that market access is not retained post-Brexit.
UK firms have similarly undertaken significant efforts to respond to the changing relationship between the UK and the EU, setting up at least 35 new subsidiaries and branches so they can continue to service customers across the EU post-Brexit and issuing over 400,000 Green Cards to their customers over the past year to ensure that any disruptions are minimised as much as possible.
The ABI worked hard, since the 2016 referendum, to ensure that key risks for our sector were addressed – and we’ve now seen many of these largely addressed. One of our key concerns has been contract continuity – ensuring customers on either side of the UK/EU divide did not lose access to pensions or insurance products as a result of Brexit. The UK had addressed this with its temporary permissions regime for inbound firms and, following representations from the ABI, last week, EIOPA finally confirmed that national regulators comply or intend to comply with their recommendations on the UK’s withdrawal from the EU – acknowledging that EU regulators, working with industry, need to take action in order to protect the interests of EU policyholders serviced by UK firms.
But while we are, as a sector, as well prepared as possible, we have to keep reminding ourselves that any ‘Withdrawal Agreement’ is just the first stage in a longer process - it is the agreement on our future economic relationship that we will have to live with for decades to come, not the divorce arrangements. And here, our sector continues to face a wholly unacceptable risk that we could end up long-term rule-takers of the trading block we have just left.
As regulators in the UK and Gibraltar absorb responsibilities that previously sat with EIOPA, they must be able to shape a regime that works for our market. This matters because our sector leads Europe We cannot be in a position where we are obliged to adopt rules designed by our competitors, with no formal ability to influence how those rules work. That is the test that the ABI will apply to any proposals for a future relationship on financial services between the UK and the EU – including proposals to utilise the EU’s equivalence framework.
Wider politics
Gibraltar has, of course, just been through its own election that saw Chief Minister Picardo re-elected – congratulations – but the political uncertainty here in the UK remains.
I do not propose to give a running commentary on the election campaign – and I certainly don’t want to make the mistake of predicting what might happen on December 12th. But what I will say is that it is by no means guaranteed that politics within the UK will be any more predictable in 2020 than it has been since the 2016 referendum.
Even once the UK’s withdrawal is ultimately resolved, there remains considerable work to do to establish the shape of the UK’s post-Brexit trading relationships – with the EU and the rest of the world. The differing range of perspectives and outlooks that have coloured the last three years of the Brexit process will continue to be significant in those debates about the shape of the future. Are we European or global? Should we take an open, free market approach or embrace protectionism? Should we open our borders for talent or restrict immigration?
The party leaders – in the UK – won’t want their legacies to be entirely dominated by Brexit. In my view, we are entering into a period of more interventionist government, whatever party, Labour or Conservative, is leading the government as the focus understandably grows on systemic inequality, the losers of globalisation and those who feel economically or geographically remote from centres of prosperity. This has driven much of the Brexit vote and we still needs to address some of the underlying issues.
Because our industry insures just about every form of activity, we are exposed to a vast range of public policy decisions – from transport to environment, from civil justice to trade policy, from taxation to welfare rules. The ABI therefore works closely with officials across 10 UK government departments, as well as policymakers in the devolved administrations.
The shape of the political environment and the capacity of governments to drive through legislation and regulatory reform will have a major impact on our markets and our customers.
Because instability is the new normal in politics and we must remind ourselves what this means for our insurance market: a greater focus on short-term issues; high Ministerial turnover and less technical expertise; and the immense difficulty to work on crucial reforms because of constraints on Parliamentarian and governmental timetables.
It is therefore no mean feat to have successfully engaged with government and MPs to work on the crucial and long-overdue reforms to the civil justice system. And while we may be disappointed with the Discount Rate result, the fact that a new system to calculate the rate has been put in place despite the pressures of Brexit is evidence of our strong position as the voice of the industry.
Regulatory issues
Renewal pricing
In this context, we cannot underestimate the significance of the FCA’s ongoing scrutiny of GI pricing practices. How we respond as a sector will be the lens through which many politicians and customers judge our capacity to adapt to the wider structural changes and challenges facing the economy.
The ABI has always been clear that our role in championing our sector does not extend to defending bad or unfair practice and we have been the first sector to proactively tackle the issue of renewal pricing.
It is now more than 18 months since the ABI launched, jointly with BIBA, a set of Guiding Principles and Action Points for GI Pricing, which affirmed that our members do not support excessive price differences between premiums for new and long-standing customers.
Many of the findings in the interim report from the FCA, however, made for uncomfortable reading – and although the FCA’s overall tone was measured, it was clear that their final recommendations will have a significant impact on the sector.
We will be submitting our response to the FCA’s call for evidence shortly and will continue to engage constructively with the regulator as they develop their final proposals.
The solution is not to curtail all the benefits of shopping around in what remains a highly competitive market. Millions of insurance customers get extremely good deals by shopping around regularly, but we absolutely agree that the household and private motor insurance markets could work a lot better for consumers who do not shop around at renewal.
At the most basic levels, there are winners and losers and the gap is too great. How to get a better balance is an extremely complex issue and we are working as hard as we can to tackle this.
Solvency II
Taking about complexity, let’s take a look at Solvency II, where the largest review of the regime since it was first introduced is now well underway.
You might ask why – in the context of Brexit – the ABI’s work remains so focussed on EU-level regulation.
Solvency II will always act as a large centre of gravity and shape any future international capital standards. Even as regulators develop a regime tailored to the needs of the UK and Gibraltar, developments at European and global level will still affect the shape of that regime – especially as the UK remains the largest insurance market in Europe with many of our members continuing to maintain major European operations (and with many being owned by larger EU-based groups).
A clear example of this is climate change and green investment. Few parts of the global economy have a bigger stake in tackling climate change than insurance and long-term savings and as institutional investors, our sector has the capacity to help shape the future of energy provision. So we must continue to work closely with regulators to ensure that, over time, the regulatory approach evolves to allow ‘impact investments’ into non-traditional sectors, including renewable energy infrastructure. We cannot remain in a position where three times more capital is required for a European insurer to invest in green infrastructure than for a Canadian one.
In my view, Solvency II is broadly fit for purpose and the ABI will not call for the regime to be scrapped or completely overhauled. Implementing it the first time was painful and expensive enough…
Where components of the prudential regime are not working efficiently, regulators should be able to make the necessary changes without weakening the protections the regime gives to policyholders or that would undermine a level playing field in our market.
The ABI has been working with Insurance Europe to ensure the process is used to defend what works and improve what doesn’t. We will be responding to the detailed consultation published by EIOPA on 15 October.
EIOPA’s stated objectives in this consultation are welcome – greater proportionality and simplicity, but no revolutionary changes. And, while it is disappointing – again – to see no proposed reform of the Risk Margin, in other key priorities for the UK market such as the Matching Adjustment that is so crucial for our life insurance, and potential limits to transitional relief, the threat of detrimental change appears to have diminished.
However, we have noted a disconnect between EIPOA’s stated objectives and with the detail of its proposals – where significant change, likely to be detrimental to industry in most cases, is proposed. Indeed, EIOPA’s own impact assessment indicates that, cumulatively, its proposals are likely to result in an increase in overall capital requirements. We also know that the reporting burden is one of the major concerns of many firms – particularly smaller firms – both the public disclosure requirement of the Solvency and Financial Condition Report (SFCR) and the private reporting requirements.
Although EIOPA’s response to criticism of its proposals has, up to now, been robust, we will continue to work hard to make a persuasive case to improve their proposals.
Gibraltar regulation
The ABI’s ongoing support for the Gibraltar insurance market is underpinned by a commitment to mutually high regulatory standards. The Chief Minister emphasised this on Tuesday. I therefore welcome the recent agreement between the UK and Gibraltar Governments and the proposals within the Financial Services Bill to protect the single market and alignment. We will continue to engage constructively with the UK Treasury and their Gibraltarian counterparts as they work to ensure the best outcomes for consumers and the efficient working of a competitive insurance market.
It is right that Gibraltar remains committed to ensuring that firms based in Gibraltar are regulated to the same high standards by the GFSC as our UK-based members expect from the PRA.
Because, as both governments understand, this is not just a question of fairness – but also one of credibility. Certainly Solvency II had an important impact and the continued success of Gibraltar as financial services centre depends on the reputation of its regulatory standards. We know that firms decide to set up their businesses and continue to do business on the Rock not because of lax enforcement of capital requirements – but because of the regulator’s approachability and because of Gibraltar’s ability to embrace innovation.
With Gibraltar having established itself as a ‘hub’ for insurance – offering a commitment to creating a supportive environment for firms to grow – we all know it would undermine the significant investment in time and resource made by both the Gibraltar Government and by firms in the Gibraltar market if there was any suggestion that firms in the Gibraltar market were not subject to the same level of regulatory scrutiny as their UK-based competitors. Especially given the role of the UK compensation scheme. I therefore welcome the ongoing commitments by Chief Minister Picardo and Finance Minister Isola and we will continue to work closely with the GFSC.
Motor priority issues:
While we see growing and welcome interest in other issues such as InsurTech, motor insurers represent a significant proportion of Gibraltar’s insurers so it seems logical to take stock of some of the key developments facing the motor insurance market before concluding my remarks.
Discount Rate
Like many of Gibraltarian insurers, we were disappointed with the then Lord Chancellor’s decision to set the Personal Injury Discount Rate at -0.25% effective from 5 August this year. I wrote to the then Lord Chancellor to voice the industry’s considerable dissatisfaction with the outcome and to make it clear that the MoJ’s impact assessment that accompanied the decision was wholly misleading and disingenuous – suggesting savings for the industry and customers of at least £230m. In reality, of course, the majority of the market had been working on the basis that the new rate would land between 0-1% in line with Ministerial public statements in September 2017, as the government had fully intended.
The then Lord Chancellor justified his decision to add an additional margin of prudence to the PIDR by arguing that claimants would need an additional safety net against under-compensation. This is not a convincing argument. Where claimants wish to be certain that their future care costs can be met, the option of a periodic payment order (PPO) has always been – and will continue to be – available. In practice, however, the unrealistically low discount rate now means that claimants will now be more likely than ever to opt for a lump-sum payment.
For future reviews, we will work very hard indeed to make a very strong case against the – in our opinion – unlawful additional margin that the Lord Chancellor added to the rate. This additional margin is a fundamental shift away from the 100% compensation principle that Parliament agreed was an important principle in setting the rate and means that claimants are now more likely to be over- rather than under-compensated. The impact on premiums is yet to be seen but undoubtedly there will be increasing cost pressures. However, the Civil Liability Act does make improvements by introducing a 5-year-review cycle that includes the Government Actuary’s Department’s advice.
Whiplash
Another key element of the government’s personal injury reform programme is the implementation of an online portal for whiplash claims. The portal will allow claimants to bring a claim and receive compensation without the need for costly lawyers or litigation – but claimants will be a able to seek legal representation should they wish to.
The Motor Insurers’ Bureau has been working over the course of the past year to develop the necessary infrastructure and we remain confident that the IT build will be delivered in time for the go-live date in April 2020.
There are, however, a number of critical policy decisions that remain outstanding to ensure that the portal will function smoothly for claimants, their representatives and insurers. The main issue remains the fact that neither the government nor the judiciary have given any indication that they will seek to provide any guidance on the valuation of minor injuries which we see as a natural area for future claims inflation for example, if you suffer minor bruising as well as whiplash. The current Judicial College Guidelines for these injuries are based on the pre-tariff damages for whiplash and therefore bear no relationship to the value of a post-April-2020 whiplash claim which will be determined by tariff-based damages.
Future issues
Data
For Gibraltar firms who want to maximise the benefits of access to the UK market, a key test of your ability and capacity to do so will come in how you respond to this issue. The specific issues raised by the FCA’s interim report also relate to the broader issue of how the industry’s use of data – particularly in pricing – is going to evolve in the years ahead.
I know from the ABI’s work with Gibraltar members that innovative use of data is at the heart of their strategies to grow their businesses.
Increasingly, we are seeing greater political, media and regulatory scrutiny of how firms use data. At present, much of that scrutiny has fallen on big tech firms and social media companies. As an industry that has always handled a large volume of sensitive personal data, it is clear that we will not be immune from the scrutiny faced by others.
The starting point for how data is used must be the attitudes of consumers – not just what we think is clever and can get away with. The ABI has commissioned a major research project from Britain Thinks, which we will launch next year, to better understand how comfortable different groups of consumers are with the potential ways they data can be used by insurers and the wider use of Artificial Intelligence.
As was the case with GI pricing, where the industry had committed itself to taking forward a set of Guiding Principles and Action Points in advance of the CMA and FCA’s work beginning, we must ensure that the industry pro-actively seeks to establish where our customer’s boundaries are in the use of their data – rather than simply waiting for external action.
We should not underestimate how direct the link can be between the technical issues within our regulatory framework and the broader, societal challenges on the political agenda. For an industry based on trust, to be distrusted – or shamed – for how we use data and AI would be a bad place to be.
New Technology
Increasingly sophisticated vehicle technology is having an enormous impact on claims costs. ABI data shows that the average cost of an own-vehicle damage claim has risen from just under £1,500 in 2014 to over £2,500 in Q2 2019.
This is partly driven by new sensors and technology that has a positive impact on claims frequency, such as AEB (autonomous emergency braking). But we must ensure that new cars and systems are designed and built with repair in mind and we will continue to work closely with vehicle manufacturers on this crucial issue.
The highly specialised and expensive equipment, as well as trained technicians, required for sensor calibration continues to pose issues with returning vehicles to the road quickly and efficiently.
While there are some areas where insurers can work together with manufacturers to help ensure that vehicles can be repaired safely and as economically as possible, there are other pressures that are beyond our control.
As many of you will have experienced first-hand, the ongoing uncertainty over the UK’s departure from, and future relationship with, the EU has led to considerable currency fluctuations. The fact that most spare parts are bought in Euros or US Dollars means that the cost of parts has increased significantly since the Referendum result and the devaluation of the Pound.
Connected and automated cars
Something would be amiss if I did not mention automated cars whilst speaking about vehicle technology. Automation continues to raise complex questions around liability and while we are supportive of the government’s approach set out in the Automated and Electric Vehicles Act, access to collision data will be key to ensure that claims can be settled fairly and expeditiously.
In the nearer future, we expect that all vehicles will be highly connected – regardless of their automated capabilities. This raises an important point around vehicle data that goes beyond claims handling and will have a profound impact on the insurance sector as a whole. This data offers a broad range of commercial opportunities for insurers, including highly sophisticated telematics solutions, fleet management or integrating the car with a smart home.
The benefits of these innovative products can, however, only be realised if vehicle data is made available to third parties – including insurers – on a fair, reasonable and non-discriminatory basis. The monopolisation of this data would pose a serious threat to the wider automotive sector. It could also undermine competition in a wide range of related industries including insurance.
Use of any vehicle-generated data will, of course, be subject to the same political, media and regulatory scrutiny as any other data that insurers may use – taking us back to the importance of understanding consumers’ attitudes and boundaries when it comes to personal data.
Conclusion
There is clearly no shortage of challenges facing today’s insurance market.
I began my remarks today by noting how significant the Gibraltar insurance market is – both to the ABI and to consumers in the UK.
The challenges we will face are also significant – both the short-term challenges brought about by political instability and the longer-term challenges where significant regulatory initiatives are already underway.
I am therefore delighted to be invited to speak to you today – it is vital that the Gibraltar insurance market is active and engaged in debates that affect its consumer base in the UK. And it is vital that the ABI is able to understand how these changes affect the Gibraltar market. We are committed to continuing to invest in this relationship and welcome the ongoing collaborative approach of Minister Isola and his team in making this happen.
Thank you again to the Minister for my invitation to address you this morning. I look forward to taking your questions later as part of the panel discussion.