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Director General Huw Evans addresses the JPMorgan European Insurance Conference

[Check Against Delivery]

June 18th 2019

Good morning.

I last spoke at this conference in June 2015 – a few months after I took up my post as Director General.

In the intervening years, you have heard from three of the ABI’s Executive team – Yvonne Braun, James Dalton and, last year, Hugh Savill. That stands as testament to the ongoing relationship between the ABI and JP Morgan – which we want to see continue.

Today, I want to talk about some of the key strategic questions facing the insurance and long-term savings sector – where decisions taken this year and next will have a major impact for the long-term.

When I last spoke to you, it was just a month after David Cameron had secured an unexpected Parliamentary majority, and I noted that we could not afford to be complacent about the prospects of the UK leaving the EU and Scotland becoming independent…

That was not a prediction but it was intended to note the interaction between this industry and political leadership. I could not then have predicted the drama and instability in UK politics over these four years but I suspect we have a great deal more to come over the next four years.

As we have seen, Theresa May’s time as Prime Minister has been dominated by the machinations of Brexit – extensive negotiations in Brussels, long hours of debate in Westminster and hundreds of legislative instruments rushed through in case of No Deal.

After all that hard work, the next Prime Minister, currently being chosen by the Conservative Party, inherits largely the same set of trade-offs and challenges on Brexit that his predecessor faced in 2016 – the prospect that this will mean the UK crashing out without a deal after 31 October remains a real one. What I said in the run-up to the first deadline of 29th March remains true – a No Deal exit would be an act of immense self-harm, damaging our economy, our reputation and our relationships with our nearest neighbours.

There is also a genuine prospect that the lack of a clear majority in Parliament for any of the available options will mean another General Election. 

However, it is also clear from the tone of the Conservative leadership campaign that there is an eagerness among politicians to – eventually – focus on something other than Brexit.

When the new Prime Minister takes office in July, they will bring with them a new set of Cabinet Ministers keen to make their own mark on the policy agenda.

We will be engaging with interest because our industry insures just about every form of commercial and human activity, meaning therefore we are exposed to a vast range of public policy from transport to environment, from civil justice to UK trade policy, from taxation to welfare rules. At the ABI we deal with 10 Government departments and devolved governments in Scotland and Wales on a routine basis.

We will need to build effective working relationships across the new Cabinet – both for the short term challenges that will be in any new Secretary of State’s in-tray and to ensure our voice is heard on the medium and long-term issues that will shape our sector’s prospects for the coming decades.

In recent years, our sector has worked hard to ensure public policy outcomes that protect consumers and the competitiveness of the industry.

Two recent examples include:

  • A new Ogden Discount Rate must be set by 6th August, but it could well be in place by the time Parliament goes into recess on 24th July. So, it could be the last act of David Gauke or the first responsibility for a new Lord Chancellor.
  • In our work on pensions and long-term savings we have been effective in making the case against the DWP’s initial very poor proposals for Superfunds, but we now must work with DWP and the PRA to ensure the regulatory framework for any eventual policy is fit for purpose and protects savers.

I know analysts will be watching the outcome of these key public policy debates closely.

But it would be a mistake to see our work on these areas in isolation – it is the groundwork that goes into our relationship with Government over time that ensures the sector is able to have its voice heard when the biggest challenges arise.

That means being a trusted provider for consumers, championing the value our sector brings to the UK economy, providing evidence-based positions to policymakers to inform these debates and – no less important – showing willingness to take meaningful steps on those areas that still bedevil our reputation.

‘Loyalty Pricing’

Which brings me to the first key issue I want to discuss with you.

The industry’s approach to General Insurance ‘loyalty pricing’ brings into sharp focus the extent to which the industry’s reputation is up for scrutiny.

Recently, Business Secretary Greg Clark described the sector’s approach in this area as ‘frankly immoral’ and Andrew Tyrie – former politician turned head of the CMA – characterised it as ‘price discrimination against the vulnerable’.

Strong words – and from two figures who you could never accuse of being either populist or anti-business.

The ABI has always been clear that our role in championing our sector does not extend to defending bad or unfair practice.

It is now more than a year 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.

We are not waiting to be told by regulators to change industry practice – Our members have committed to a set of measurable action points – to address those criticisms from Greg Clark, Andrew Tyrie and others head-on.

At the same time, we have responded to the CMA’s investigation following last year’s super-complaint and we are working with the FCA, as they continue the process around their market study – with an interim report due over the summer and then the final report in early 2020.

The solution is not for all insurers to adopt identical approaches or to curtail all the benefits of shopping around in what remains a highly competitive market. In any competitive market, there will be customers who benefit and some who do not. Currently, this benefit mainly falls to customers who always switch provider every year.

But we must do something. Next year, we will publish a report on the impact of our Guiding Principles and Action Points. This is an important test of our sector’s ability to recognise where market practices can lead to unwelcome outcomes for customers and to act to address it.

Pricing and Data

‘Loyalty pricing’ in the GI sector takes me on to the much wider question of how pricing will evolve over time through the increased use of ‘Big Data’.

Our sector has always handled a large volume of customer data, much of it sensitive, and used it to price risk accurately.

But the volume of data being shared and stored dramatically changes the nature of the debate – 90% of all the data in the world has been created in the last two years.

And if much of this data is seemingly pointless, it still provides the stimulus to a major shift towards AI and machine learning - a 4th Industrial Revolution.

We know that 5G will be a game-changer that won’t just allow humans to share their data but will allow machines to constantly share data with other machines and databases – we already have more connected devices in operation than there are people on the planet, and projections suggest the overall number could rise from 20billion to 50billion in the next decade.

And not all this ‘machine to machine’ data will be benign – data generated by our vehicles, wearable devices, fridges and heaters will often be personal data – and will raise significant questions about the ownership and inter-operability of these datasets.

And not all ‘big data’ is infallible. The algorithms in my iPhone failed when they sent me what was supposed to be a cheerful reminder of a ‘favourite place’… in fact, a scenic woodland spot in Wales where my sister and I scattered the ashes of our parents.

That’s just one example, but lots of minor mistakes in a dataset can quickly turn into a major problem. Just look at the case of Amazon’s attempt to introduce AI into their internal hiring practices – despite the intention of AI eliminating human bias, they had to abandon the project as their algorithm taught itself to replicate the historic biases against female candidates.

So, the starting point for when and how to make greater use of AI in our sector has to be the attitudes of consumers. The ABI has therefore commissioned a major research project, in partnership with Britain Thinks, which will allow us to understand on a qualitative and quantitative level what consumers are comfortable with and what will need more careful consideration.

This research will first be used to inform our approach to how data is used in risk assessments for GI premiums, but our learning will also impact our work on long-term savings, both how we design Pensions Dashboards and wider issues, such as the role of AI in giving advice and guidance to customers at different stages of the savings journey.

Just as with our Guiding Principles and Action Points, we are not waiting for external intervention – but making sure we understand for ourselves what consumers expect.

Climate Change and Green Finance

Another area where insurers face a combination of interest from regulators and wider political and media scrutiny is the increased focus on climate change and sustainable finance.

This is an example of how direct the link can be between the technical issues within our regulatory framework and the broader, societal challenges on the political agenda.

You don’t need me to go into detail on the impact of climate change – but we know it means major environmental disruption and associated geopolitical tensions as these get worse.

McKinsey estimates that, by 2025, we require a tenfold increase in ‘carbon productivity’ – the amount of GDP per equivalent unit of carbon emitted.

Insurers are uniquely placed to enable the major investment shift needed – because we are heavily impacted by the cost of inaction and as a sector manage, in the UK alone, $1.9 trillion of investments, which need to transition safely to cleaner assets.

So, we strongly welcome the increased focus on this from prudential regulators – both recent work in the UK and the proposals in the consultation EIOPA launched on 3 June.

It is interesting to see EIOPA conclude that the one-year time horizon – so fundamental to Solvency II’s approach to capital requirements – does not suit a risk that is set to emerge over the next 10 or 20 years.

So, the ABI wants to work with regulators to ensure that, over time, the regulatory framework evolves.  

This certainly does not mean deviating from a focus on financial stability. But, through joint work between the sector and the regulator, more could be done to highlight possible opportunities – including ‘impact investments’ into renewable energy infrastructure - and ensure that regulation is not acting as an unintended disincentive.

Regulatory challenges

Clearly, the industry response to this will need to evolve further – just as it will for the many other macroeconomic trends that will unfold over several decades.

There can be a temptation when making speeches like these to decide to focus exclusively on either the short-term strategic priorities or the longer-term trends.

I think this often creates an artificial distinction.

After all, such trends already occupy a considerable amount of the intellectual bandwidth of boards and executive teams in our sector.

And what may seem to be more short-term regulatory developments will set the framework within which the long-term issues are addressed - and will impact the design today of vital insurance contracts that will then have a 20-30 year lifespan.

Two examples, in particular, stand out as being both an urgent shorter-term priority and having significant long-term significance – the 2020 Solvency II review and the introduction of IFRS17.

Solvency II

The next review of Solvency II is upon us and much is at stake in the broadest review yet of the regime since its introduction.

Solvency II is broadly fit for purpose – it is bringing a more economic, and consistent, approach to prudential regulation across Europe.

We are not calling – and never have called – for it to be scrapped or completely overhauled.  Implementing it the first time was painful and expensive enough…

But this review does provide an opportunity to refine what works and improve what doesn’t. And to tackle the ridiculous amounts of disclosure required.

Most of the focus, as it always is, will likely be on Pillar 1: balance sheet valuation and solvency capital requirements.

This will include, for the first time, a review of the long-term guarantees package that we painstakingly agreed between governments and politicians as part of the Omnibus 2 negotiations.  This ensured that Solvency II became a reality and it will require careful treatment again.

Regulators including EIOPA and the PRA have stated that they view the European insurance industry as adequately capitalised. So, we would not expect aggregate capital levels to increase as an outcome. It is also encouraging that EIOPA’s own analysis shows that the Matching Adjustment – used widely by the UK life industry – is working as intended.  We agree and see there is a strong case for maintaining it as a separate, independent element within the Solvency II framework, with no dilution in its impact.

But where other components are working less efficiently – such as the Volatility Adjustment and the Risk Margin – let’s use this review to fix them.

Also in scope is an area that most people in the room no doubt have views on - Pillar 3 (reporting and disclosure).

We know that policyholders are not reading the annual disclosures that firms are now required to make on their websites – the Solvency and Financial Condition Report (SFCR). And we hear from some analysts that the SFCR does not actually provide a suitable view of the firm’s solvency or financial condition.

And the SFCR is only a minor part of the reporting burden – the vast majority consists of private reporting to the regulator and EIOPA.  The cost and management overhead of pillar 3 is significant – especially for smaller firms.

The answer should not merely be to ask firms to produce yet more information.  Instead, let’s take a close look and make sure we are providing the right information for those with an understandable interest in the financial security of a firm

You might ask why – when the UK’s Exit from the EU is imminent – the ABI’s work remains so focussed on EU-level regulation. But Solvency II will always act as a large centre of gravity; even as UK regulators develop a regime for the UK market, developments at European and global level will still affect the shape of that regime – especially given that we remain the largest insurance market in Europe, with much of our membership remaining active in European markets.

Indeed, my second example of a key regulatory challenge goes beyond Europe – IFRS17 seeks to apply across the globe.  

IFRS17 Insurance Contracts

I discussed earlier that, despite much promise, Solvency II does not yet seem to be delivering for analysts, as had been hoped.  The implementation of IFRS17 Insurance Contracts could provide another opportunity, from a different place, to plug this gap. International standards which bring greater comparability and consistency would add value – both for firms telling their business story and the audience they tell that to.

Much like Solvency II, the development of IFRS17 has been a long and winding road.

But this, in itself, is no guarantee of quality.

Developing the standard is undoubtably complex – it needs to deliver for the diverse range of insurance products and business models operating in different jurisdictions around the world. 

But we want to make sure we get the standard right first time. It is in no one’s interest for it to have to be constantly updated. And it is in no one’s interest for the industry to spend vast sums of money – some estimates are even higher than what we spent implementing Solvency II – for a standard that doesn’t deliver significant improvements in reporting.

From a UK perspective, we believe important changes need to be made to address concerns that have arisen through the recent series of industry case studies and firms’ internal implantation planning.

I don’t propose to list the range of technical issues - but I will take the opportunity to emphasise just one of them:

  • Transition arrangements: We need to get the opening numbers right. If we don’t, this will mean having values on the opening balance sheet and subsequent profit emergence patterns that don’t relate to how the business is run – and the consequences will be felt for a long time, given the 20/30-year nature of some insurance contracts. It is not surprising data gaps exist as against wholly new accounting requirements, given how long many contracts have already been on the books – therefore, we believe that it will be necessary to allow greater flexibility to make the estimates that are inevitable.

However, getting this right should not require lengthy delay - firms already have their implementation programmes underway. 

We will be using the forthcoming IASB (International Accounting Standards Board) consultation on their latest Exposure Draft as an opportunity to encourage them to make sure the standard is right first time.


So, in conclusion, public policy making and financial regulation never stand still. But key decisions ahead will shape our sector’s long-term competitiveness and determine the extent to which our sector can shape the wider economic response to macroeconomic challenges. Get these decisions right, and our sector can lead the way.

I am clear that regulatory initiatives, both at a global level and those designed for the UK market, must be robust – we don’t oppose the core purpose of Solvency II or dispute the need for IFRS17.

But, in the coming months, my message to the newly reshuffled Cabinet – and equally relevant to European leaders and the newly appointed Commission – will be that we need financial regulation that strikes the right balance: addressing political imperatives but making sure that our sector can play its full role as investors, as providers of innovative products to households, businesses and savers and as a global leader in insurance.

We seem to live in a time where spouting extremist positions are in vogue. I’m unabashed in recommending a middle way that can optimise the role our sector can play without endangering financial stability or consumer interests. Ultimately, the challenges our society faces – as I have been setting out – are too great not to maximise the role our sector can have in addressing them.  

Last updated 19/06/2019