Good morning – I’m very pleased to be here with you today.
UK insurance has a long and proud history, stretching back to the London coffee houses of the 17th century. But there is nothing old-fashioned about today’s industry. It is a great UK strength and an industry we are proud of.
It is good news for everybody – your shareholders, your customers, and the wider economy – that British insurance is the best in Europe. Our ambition, as a government, is to do our utmost to keep it that way.
The insurance industry has a dual social role.
First of all, it is vital in helping businesses and individuals manage risks and plan for the future.
But it is also a key contributor to national prosperity. You employ 300,000 people. You sell £20 billion a year in exports. In 2014, the industry held £1.9 trillion in invested assets and contributed £29bn to the country’s GDP.
The past few years have had important developments on both fronts.
We all remember the floods of 2012 and the winter of 2013-14.
Flooding is a stark example of the importance of insurance, and I would like to thank the insurance industry and the ABI in particular, for their hard work and commitment to successfully progress Flood Re.
It is a great example of government and the private sector working closely together. It will ensure available and affordable insurance for those at high flood risk and will make a real difference to people’s lives.
I am delighted that the regulations introducing Flood Re have now been approved by both Houses in Parliament and that Flood Re will soon be designated. This means that Flood Re will shortly receive its powers and duties. Subject to Prudential Regulation Authority (PRA) approval, it will then have the legal authority to start operating.
We’ve also had the most fundamental change to how people can access their pension savings in nearly a century. Adapting to these changes has required a great deal of work from the industry, and I have been impressed by the many providers that have stepped up to make these reforms a success.
Over 200,000 people have taken advantage of the new flexibilities and I’m pleased that already over 90% of customers are being offered flexible options, and that a quarter of the largest providers are planning product launches in the next six months.
The ABI has found that £5 billion was accessed by savers in the first six months of the freedoms. That represents a major step forward in creating a climate where individuals can take control of their own hard-earned savings, and enhance their retirements as they see fit.
These are truly historic reforms, and the government will work closely with industry to ensure that they deliver real freedom and choice for consumers.
We’ve also had major steps forward on the prosperity agenda.
The Insurance Growth Action Plan tasked UK Trade and Investment to develop target market strategies for China, India, Brazil, Turkey, Indonesia – that is, some of the most rapidly growing markets in the world.
These strategies were designed to sell the UK insurance markets’ comparative advantage in these emerging markets, and are already helping UK insurers to access those markets.
Which means more revenue, more jobs, more growth.
So there’s been no shortage of good news stories. But there are also important challenges ahead.
Our changing society and our rapidly developing technological landscape means that there is a lot for the industry to adapt to.
With challenges, of course, come opportunities. UK financial services are nothing if not adaptable – so I know that the industry will adapt to the changing environment, spot new opportunities – and continue growing, and serving their customers.
So what are the key areas of change – and of opportunity – for the future?
I would suggest three:
The first, keeping up with a changing society;
The second, making the market even more effective;
And the third, staying competitive in the global race.
Pensions are a vital part of the insurance industry. And it’s no secret that, as our society enjoys ever-greater longevity, the pensions system will require a new approach.
We have two principles here:
First, that people who have spent their working lives saving money into their pension pots should have the freedom to decide how to spend that money.
And second, that pension products should meet the needs of different types of pensioners;
The government’s policies are transforming retirement savings for the long-term, from top to bottom. The pension freedoms we have introduced mark an unprecedented shift of power, away from government and industry, and towards the consumer.
Good progress has been made to date. But it is important that industry continues to innovate, and introduce new products that are tailored to consumers’ changing needs.
In light of the recent reforms, this is a great time for the industry to reflect and consider what it can do to provide a better service and encourage more people to think about saving for retirement.
Now that customers have more choices, they will also want more advice. And it is clear that new and emerging technologies have an important role to play here.
New digital models to provide high-tech, low-cost, user-friendly advice are emerging in the industry all the time. These new technologies could have a significant role to play in meeting customers’ needs around financial advice.
The Financial Advice Market Review, launched in August, is considering the opportunities and challenges presented by such technologies to provide cost-effective advice services. In particular, the review seeks to understand how the regulatory environment can support technology-based advice models. The review will report back at Budget 2016 and I would encourage all of you to engage with it.
Looking to the future, the pensions tax consultation was an opportunity for insurers to take stock and consider how the industry can adapt and provide a better service
It’s been really positive to see the ABI, who have been a key stakeholder, working closely with government to ensure pension provisions are improved.
The consultation closed at the end of September, and we’ve already picked up on some of the key themes:
- the need for more effective communication around the importance of saving for a pension;
- the significance of having a stable system;
- the need for consistency in the system to tackle perceptions of unfairness.
The ABI will be a great support to us in developing our policy over the coming months, and we look forward to working with them.
But, of course, it’s not all about pensions. And the second area I’d like to touch on today – making the market even more effective – touches on all aspects of the insurance industry.
Effectiveness comes from security.
Insurance fraud is a significant problem, which comes at a great cost to consumers and industry. It’s a particular issue with motor insurance – and the government has taken a number of steps to tackle this problem.
Earlier this year, the government set up the Insurance Fraud Taskforce. The group, made up of consumer and industry representatives, has been asked to investigate the causes of fraudulent behaviour and recommend solutions to reduce the level of insurance fraud. We hope to achieve a set of robust and ambitious proposals by the end of the year, ultimately aimed at reducing the cost of insurance fraud for consumers.
We have also set up MedCo, which became operational in April 2015. It will facilitate the independent sourcing of medical reports in soft tissue injury claims, helping tackle fraudulent and unnecessary whiplash claims. And we’re reviewing the MedCo Portal, to make sure it’s meeting its objectives and tackle teething problems.
Effectiveness also comes from making the most of new technology.
I’ve already touched on how automated advice systems can help provide low-cost but high-quality advice on pensions.
But there’s much more it can do. Financial technology helps the customer and – as a driver of innovation – it helps the industry’s competitiveness.
That’s why we’re pulling out all the stops to foster the best investment environment, the right tax system, the appropriate regulatory framework and the best infrastructure for Fintech companies to flourish across the UK.
We now have a “Special Envoy for Fintech” in the shape of Eileen Burbidge, whose role will be to promote the UK as a global Fintech hub and help develop our strategy.
We’re launching an international benchmarking exercise to look at how we perform compared to other countries.
And we’re working closely with the regulators to explore how we allow innovators to experiment with novel ideas early on, without having to worry about getting regulatory authorisation.
It’s an exciting, rapidly growing area – so I look forward to your ideas on how we can make the most of it.
To make the market work more efficiently, we also need to take action on tax measures where appropriate.
I know, for instance, that concerns have been raised by several UK insurers that misuse of the EU status of Gibraltar by other UK insurers to avoid VAT was impacting on their ability to compete fairly.
So at the Summer Budget we took action, and changed the VAT rules so that the supply of these insurance repairs services is deemed to be where the service is used and enjoyed – i.e. in the UK. The measure will level the playing field and deter possible expansion of this avoidance.
And while we’re on the subject of tax, I would like to say a few words about the insurance premium tax – IPT for short.
As you know, the UK standard rate of IPT remains lower than many other EU states, including Germany where the standard rate is 19%.
As part of the Summer Budget, it was announced that the standard rate would be increased from 6% to 9.5% as of 1st November.
We recognise the challenges insurance businesses have faced in implementing the IPT rate change this summer. I can assure you that HMT officials are in close communication with industry representatives, to see whether the HMG/ABI agreement on amending the rate needs to be reviewed.
In addition, as part of a major exercise in digitalising the UK tax system, we are making operational changes to make it easier for insurers to submit their IPT returns.
We would like to thank you for the cooperation we’ve had so far and hope that you will agree that the government’s work on e.g. tackling insurance fraud and VAT tax avoidance will help keep premiums down in the long run.
The third area which I would like to talk about today is global competitiveness.
We have made real progress in showcasing what we have to offer internationally. Already, we’re reaping the rewards.
But we also have to be constantly on the lookout for opportunities to keep us one step ahead. And where we risk falling behind, we need to act.
One such area is alternative risk transfer.
Through Insurance Linked Securities (ILS), new ways have been found to share insurance risk with capital markets. ILS has helped to increase the capacity of the reinsurance sector, particularly for specialist or extreme types of risk, and investors have benefited from high performing assets which diversify portfolios.
This is now a $60 billion market and growing fast. ILS looks here to stay.
But crucially, the UK does not currently have the right framework to support the growth of ILS in the London market. So there is the risk that the expertise which ILS business requires could be drawn elsewhere.
That is why the Chancellor announced in the March Budget that Treasury and the UK regulators, working closely with the London market, would design a regulatory and tax framework to support the domicile of ILS business in the UK.
And as well as constantly refocusing ourselves, we also have to ensure we remain competitive within Europe.
Europe, at its best, can bring good benefits. Put simply, our insurance firms tend to do very well in Europe.
Our industry’s use of technology and experience of online sales gives us an edge in European markets where a large number of UK insurers already operate. And our continued role in the EU has helped us influence regulation to protect UK interests, such as the long-term guarantees package in Solvency 2.
A few weeks ago, the commission launched its action plan for Capital Markets Union (CMU), a flagship project for the new commission. Its primary objective is to create deeper and more integrated capital markets in the EU, by breaking down the barriers to the free movement of capital.
The action plan recognises that Europe requires significant long-term investment in assets such as infrastructure. Insurers, who often have long term liabilities, are the largest institutional investors in Europe and natural investors in such assets.
So the CMU is good news for insurers, good news for the City, and good news for the UK.
Having said that, there is a balance to be struck between regulation and competitiveness.
We have been supportive of Solvency 2, for example, as it represents a major improvement on the patchwork of European insurance legislation under the previous Solvency 1.
Solvency 2 is the global gold standard in insurance regulation and will bring opportunities for UK firms to expand to new markets, to innovate and to provide new products.
We firmly believe Solvency 2 will help support financial stability across the financial system, while securing insurers’ central role as a stable, long term provider of finance through the “matching adjustment”.
We recognise Solvency 2 will need time to bed in, and we will be monitoring its impact closely. In particular, we have pressed for consistent and proportionate implementation to ensure a level playing field across Europe. We will also be keeping a close eye on how Solvency 2 affects the competitiveness of UK firms outside the EU.
So as can be seen, it’s been a busy time for the industry!
But, I hope, also an exciting time.
As the UK economy continues to go from strength to strength – and just last week, we had the news that we are now the top G7 country in terms of the ease of doing business – that will create fresh opportunities for UK businesses.
We look forward to working with you to make the most of those opportunities.
No doubt, there are challenges ahead; but I firmly believe that with a savvy approach and a flexible outlook, the UK insurance industry can continue to be a world leader for many years to come.