The future of the UK insurance industry post transition and learning lessons from the pandemic
10 February 2020
Introduction
Good morning.
To draw on a weather metaphor, 2020 was a stormy year for the UK insurance industry with a few points of sunshine.
To start with the bright points. In response to the global pandemic, insurers collected over £100 million through the Covid-19 Support Fund; provided support to tens of millions of customers; we developed and implemented new and innovative reinsurance schemes to support the economy; and our members and Lloyd’s expect to pay at least £1.7 billion in Covid-related claims. Insurers also helped businesses and customers recover from major flooding and moved smoothly to remote working without any major service disruption.
But when the history books are written, none of that will feature much. This is because the global pandemic has highlighted an acute expectation gap between customers and insurers. That is why, in my remarks today, I wanted to cover three key themes around trust, transparency and product simplicity set against the backdrop of the FCA business interruption test case, touch on the challenges to public policy driven by the pandemic; and finally to set out five key opportunities we have as an industry to rethink the way we do things and how we can amplify the positive role our sector plays in society.
Trust, transparency and simplicity
As the first national lockdown began last March, insurers began receiving claims from businesses hoping that their business interruption insurance policies should cover them for pandemic-related losses. The ABI had to explain that the vast majority of business interruption insurance only covered physical damage, such as fire or flood damage, with a similar statement made by the Financial Conduct Authority. We were criticised at the time, but we felt that it was better to be clear and transparent with people even if they didn’t like what we were saying.
For those business interruption policies that did provide cover for non-property damage interruption caused by infectious diseases, there were genuine questions of whether, and the extent to which, they covered pandemic-related losses that had resulted from an unprecedented national lockdown. Insurers and the ABI worked with the FCA on a novel, fast track process to obtain a definitive view from the courts on 21 sample policy wordings. It could easily have taken 2-3 years to obtain a final judgment from the Supreme Court, but it only took 8 months. Despite the headlines saying that the FCA was taking insurers to court, this was a process that the industry supported and worked with the FCA to enable. After nearly 400 pages of legal rulings from the High Court and Supreme Court, it was decided that, of the 21 wordings, 7 did not provide cover and 14 provide either some or complete cover in certain circumstances. In reaching this view, the Supreme Court quashed a previous ruling that had been the basis of insurance contract law for the last decade.
The focus now is for insurers to support their customers - through the swift payment of valid claims, making interim payments, and providing clear and prompt answers to customer questions. Our members are setting up surge teams of claims handlers to get this done quickly. Brokers also have a key role to play here in helping their customers get documentation together so that claims can be processed as swiftly as possible, in addition to helping explain to some customers why their policy was not considered to provide cover by the courts.
What has this process taught us as an industry? As you might expect, the process of reflection is on-going but I wanted to offer you a couple of thoughts.
Firstly, for an industry that had a problem with consumer trust before the pandemic, this episode has made things worse. Despite the fact that an average of £17 billion of claims are settled each year, there continues to be a deeply-held customer perception that insurers always try to wriggle out of paying. It is often said that claims are the shop window of the insurance industry, so it is essential that we redouble our efforts as a sector to pay valid claims quickly and with a simpler customer journey.
Secondly, we must address the expectation gap between what a customer thinks an insurance product provides for and what the insurer intends to cover. It was for this reason that I wanted to be involved in the recent work of the Chartered Insurance Institute’s Transparency Forum which has made a number of recommendations to the industry about how to better meet customer expectations. And I use the word industry rather than insurers deliberately. Brokers and risk managers need to work together with insurers - as an industry - to ensure that customer understanding and engagement are prioritised over the speed of a sale.
Thirdly, we must redouble our efforts to engage in solutions to help tackle the hardest elements of risk to cover. In a time of crisis, the public understand that not everything can be insured. But they expect insurers to lean into the challenges posed and to work to develop solutions. There is no doubt that some product lines have become more expensive, if insurance can be secured at all. That does not mean that there is a market failure. What it means is that the industry and the Government need to work harder to develop creative and innovative interventions to allow the wider economy to continue to function effectively.
Throughout the pandemic, you’ve seen the insurance industry rise to that challenge. We have worked with independent healthcare providers to enable the NHS to take over private hospital capacity to enable non-Covid+ patients to get the sometimes life-saving treatment they need. Negotiations resulted in the establishment of a £10 billion reinsurance scheme which shares the trade credit insurance risks between the public and private sectors, and which enables trade between businesses to continue. And we have worked with the Government to put in place a time-limited indemnity arrangement to provide state-backed insurance for care homes designated as being appropriate to accommodate Covid+ patients being discharged from hospital. There are lessons to be drawn from all of these interventions as we continue to seek to work with the Government to address one of the most pressing issues of our time in relation to the remediation of buildings with combustible cladding and other unsafe construction.
Where there are difficulties in the availability or affordability of insurance, many people call for the establishment of a reinsurance arrangement akin to Flood Re. This is not necessarily always the answer – the bar to establishing such a scheme to address a public policy problem should, in our view, be a high one. There should be a genuine market failure, where no other public policy intervention could solve the underlying problem. Establishing such schemes is a complex and lengthy process and, it is important to remember, they are based on a cross-subsidy between consumers – one group of people pay more for their insurance so that another group can pay less. Such an arrangement comes with inherent public policy challenges and trade-offs, requires clear political will and a demonstrable and long-term benefit.
As the events of the last year have shown, the costs associated with dealing with a global pandemic necessitating national lockdowns are astronomical and far beyond the ability of any domestic insurance industry to cover, so there have been calls to establish a so-called Pandemic Re scheme. The key question is whether Government intervention after the event is preferable to establishing a Government-backed scheme before the event which builds up huge reserves and is potentially unused for years, if not decades. I’m sure that these challenges will be carefully considered by the Government’s newly established Contingent Liabilities Group as they will continue to be by the ABI member group examining these issues. We hope to engage with the Government on this once the health impacts of the pandemic are behind us.
Having said all of that, I still believe the industry’s response to the pandemic should not be defined wholly by the issues associated with business interruption. I’ve already referred to the expected £1.7 billion of Covid-related claims that will be paid; we will shortly be publishing an updated estimate of this number. And over 40 million insurance customers have benefitted from the reassurance and clarity provided through our customer commitments around home working or using their car for work and NHS volunteering. These commitments took an additional stress away from people at a critical time and they remain in place today.
In addition, our Covid-19 Support Fund has collected over £100 million and is a demonstrable commitment to the customers and communities that we are part of and that we serve. To date the Fund has made grants to 17 projects, providing much needed support to charities and community groups that have been hard hit by this crisis, such as those working with victims of domestic abuse, those with mental health challenges and those with learning disabilities – making a real and lasting impact when it is needed most.
Looking to the Future – Building Back Better
The lessons learned form part of a bigger dialogue relating to the role that the insurance industry can play in helping the UK Build Back Better from the pandemic. In that light, there are a number of significant opportunities that we need to grasp, and I wanted to say a few brief words on each before closing
FCA’s GI Pricing Study
Firstly, as everyone knows, the FCA’s consultation on GI Pricing Practices closed in January. The CEOs of the major insurers believe this piece of work represents a once-in-a-generation opportunity to fundamentally change for the better the way insurance products are priced, bought and sold. Price comparison websites have long done a useful job at helping consumers shop around. But this has come at a cost, especially to those customers who do not want to change insurer every year and who have ended up paying for the discounts demanded by those who do shop around. We need a market where consumer loyalty is not punished and where constant shopping around only on price is not unduly rewarded; the quality of the product and whether it meets the consumer’s needs is just as important as price. That is why we wholeheartedly support the FCA’s attempt to have a system where customers focus on product appropriateness and quality.
As we have made clear, however, in a highly competitive market where, as the regulator has admitted, there are no excessive profits, any realignment is likely to mean some customers will benefit and others will not. We all need to be honest about that reality. There are many who rely on switching every year to keep their insurance costs low. Their inability to receive the benefits from reduced new customer prices may mean they consider not buying insurance at all, with potentially significant negative consequences for them both in the motor and the home retail markets. No-one wants to see an insurance apathy trap where customers become even less engaged in the insurance purchasing journey. Less engaged customers are less informed customers which present a real risk to the industry.
Solvency II
The second opportunity I wanted to touch on is the review of Solvency II currently being undertaken by HM Treasury. Having lived with Solvency II for the past five years, it is clear that there are areas that could be improved, and, post-Brexit, we are now able to look at the framework from a UK-specific point of view rather than accommodating the requirements of 27 other states.
Current restrictions on the types of investments that can be held drive insurers to holding large volumes of corporate bonds and sovereign debt, so changes to Solvency II in the UK could lead to a more balanced portfolios of investments. Changes to the Risk Margin and Matching Adjustment mechanisms will allow the industry to invest for the long-term and in much more socially useful areas such as green technology, infrastructure or a wider range of corporate debt, without undermining the security of policyholders. There are billions of pounds of insurer assets that can be repurposed to the critical challenges facing us; the transition to net zero and the economic recovery from the pandemic. The Solvency II review offers a once in a generation opportunity to make those changes.
In addition, the substantial reporting requirements on firms are often burdensome with little demonstrable benefit and the timeframes for getting regulatory clearance are too slow which drives new market entrants to Gibraltar or Bermuda. So, as part of our submission to the Treasury’s review, we will be making the case for how reporting can be improved and how regulatory decisions can be made more quickly. If we are to meet the Government’s objective of a “vibrant and internationally competitive market” then both these things need to improve, and it is this potential for change which represents a significant opportunity for UK insurers.
Climate Change
The third area of significant opportunity for UK insurers is helping to tackle climate change.
2021 will be a key year for global efforts to tackle climate change as the UK prepares to host the COP26 conference where the focus will turn from the ‘what’ of target-setting agreed in Paris to the ‘how’ of meeting those objectives. ‘Unleashing the Finance’ is one of the UK Government’s five priorities for the conference and, with Mark Carney having laid down a challenge of making climate a factor in every financial decision, there will be an expectation on the insurance industry to act.
I want to dispel any notion that our work to address climate change is a ‘worthy cause’ unrelated to the other industry priorities I have discussed today – it is fundamental to our sector’s long-term prospects and one where we have a unique role to play. As well as helping people manage the risks that arise from a changing climate (flooding, wildfires and crop failures), insurers are also major institutional investors, with the capacity to drive the growth in renewable energy and sustainable infrastructure needed to mitigate global temperature change. We want to make sure that insurance is in the leading pack of industries transitioning the economy to net-zero, so will be working closely with Government, regulators and climate experts to ensure our sector’s potential to achieve this objective is realised.
Economic Contribution of the industry
Insurance will have a vital role to play in building back a more balanced economy, not just a greener one, and this is a fourth area of opportunity for our sector. At its core, the purpose of insurance has always been to provide people with a safety net and to provide support at times of greatest need. As we look to rebuild the UK economy in the wake of the pandemic, it will be important for us all to recall this fundamental purpose.
ABI research has shown that a significant majority of the public feel that insurance products will become more important to them over the coming months and years – be it in providing protection for their homes, health and cars, or in protecting their business through the recovery. It also shows that, as the economic challenges continue, our sector will be ever more important in providing a sense of security and protection for consumers’ financial futures. Nearly three quarters of those surveyed believed that “insurance supports people to live their lives with confidence”. We must live up to this sentiment.
Insurance following the end of the transitional period
The fifth and final key opportunity I wanted to touch on relates to insurance in a post-Brexit world. The insurance industry was as prepared as it could be for Brexit but there are some non-trade related issues that still need to be resolved. We continue to press the Commission to allow the UK to (re)join the Green Card Free Circulation Zone, removing the requirement for UK motorists and hauliers to carry a Green Card when driving to the EU. We also want to see the Commission recognise the UK as being equivalent for reinsurance purposes, and for the 6 month ‘bridging’ arrangement for UK-EU data transfers to be used to complete the EU’s assessment of the UK’s data adequacy framework.
But the UK now also needs to seize the opportunities that the end of the transitional period brings to ensure that the UK continues to thrive as a financial services hub in a globally competitive marketplace. Things have started well. The review of Solvency II I spoke about earlier is vitally important in securing the competitiveness of the UK regulatory environment. But the Treasury’s Future Regulatory Framework review also represents an important opportunity to ensure the UK is both robust and competitive, which is why we see regulators with statutory objectives in relation to economic growth, underpinned by proper accountability, as so important.
Conclusion
In conclusion, 2020 was certainly a year like no other and one that posed significant challenges to the insurance industry. As an industry we need to learn important lessons from the last 12 months and we have a unique set of opportunities to help to reset the insurance dial. We must seize them and work collaboratively with many of those speaking today to do so.
Genuinely improving consumer trust, tackling long-standing problems and investing decisively in the future challenges we face. There is an exciting period ahead where, I promise you, insurers will play their full part.
Thank you.