Speech by the Financial Secretary to the Treasury.
It is a pleasure to be with you at this year’s Insurance Day Summit and to have the opportunity to address this gathering of the insurance community.
To welcome you to the event, I want to talk about this morning is the vital contribution that the insurance sector makes to the UK economy.
I realise that I’m preaching to the choir here, but insurance doesn’t always get the attention that it merits – and today is an excellent occasion to put that right.
The insurance contribution to financial services and the UK economy
The insurance sector is an integral part of what makes the City so attractive to multinational companies, to global capital, and to a huge diversity of professional talent. That goes for the rest of Britain too; and this is something that I am keenly aware of wearing my other hat as Minister for Cities. I could just as easily be giving a speech about the significance of insurance to the UK economy in Edinburgh, Norwich, or York. In fact, the same goes for my own constituency of Tunbridge Wells, where AXA PPP is the largest private sector employer.
I’m sure you’re all familiar with the key facts and figures on the national importance of the insurance sector, but let’s state them for the record: Approximately 290,000 people employed; £10.4 billion contributed to the Exchequer in taxes in 2010-11; and managed investments amounting to 26 per cent of the UK’s total net worth.
You can even see the importance of the sector on London’s changing skyline. New developments, such as the Leadenhall Building and 20 Fenchurch Street – also known as the Cheesegrater and Walkie Talkie – have been pre-let to a range of insurers and cement London’s status as the global capital of the industry.
One of the world’s largest insurance brokers [Aon] has recently relocated its international headquarters from Chicago; and AIG has moved its European headquarters from Paris.
It’s not just about buildings, of course. The City’s ability to attract a multinational, multilingual workforce also enables this country to compete in a global marketplace.
Looking to expansion overseas, research from the Department for Business, Innovation & Skills on the revealed comparative advantage of particular sectors, shows that when compared with leading high growth economies – including China, India, Indonesia, Malaysia, Singapore and Thailand – the UK has a large comparative advantage in insurance, a testament to the relative specialisation of UK insurers in global markets.
However, the global marketplace is not standing still, and – as the Prime Minister has stated – the UK is currently engaged alongside other countries in a “global race”. The government recognises that the insurance industry is a key asset for this country and is determined to maintain and sharpen the sector’s competitive edge.
The identity of the UK insurance sector: past and present
Since taking on my current role, I’ve had the opportunity to engage with insurance industry leaders – and collectively and individually – I greatly welcome the insights and challenges you’ve given me.
The thing I’ve heard most often from the sector, in a range of contexts, is words to the effect that “insurers are different from banks”.
Now, this is obvious to all concerned. But given everything that’s happened over the last five years, it’s not surprising that banking has dominated the policy agenda. Indeed, in terms of public perception, banks have come to symbolise the entire financial services industry.
This is to misrepresent financial services – and the insurance sector in particular.
So, drawing on your history and traditions, I’d like to describe some of the things that, for me, characterise the sector.
First, throughout its history the insurance sector has been an important part of the UK’s social fabric, meeting the social needs of communities and advancing the public good. This was true in the original fire cover provided by insurance companies before public fire brigades were established in the mid-19th Century – an example of a social good if ever there was one. And in the 19th and early 20th Century, the door-to-door sales forces of firms like Prudential and Pearl brought the benefits of long-term savings and insurance to the mass market.
More broadly, it is also evident in the support the sector has provided to welfare and wellbeing, as well as the valuable risk transfer function it fulfils.
Aligned with this social purpose is an emphasis that the insurance sector places on the long-term. This is evident not only in the way that firms are managed, from the fundamentals of the business model and some of the types of products on offer, but also in investment objectives that focus on long-term growth and through the important role insurers play as institutional investors.
Second, the insurance sector in this country has traditionally been outward looking and international in nature. This is closely related to the country’s financial and economic transformation during the British enlightenment and the Industrial Revolution, and to the ascent of Britain as a trading nation.
An international outlook is clearly more important now than ever – with the drive to penetrate high growth economies; to meet the needs of an emerging global middle class; and the importance of sustaining the interconnected global supply chain. This internationalism is something that has, however, been part of the insurance industry in this country for centuries. Indeed, with policies for commercial space flights now being written in London, British insurers are even extending their outlook beyond this world.
Third, insurance in the UK has always been at the forefront of innovation and made the best use of the latest technology – whether pioneering new ways to reach consumers or developing creative new product lines.
Direct Line, founded in the mid-1980’s, transformed the distribution of motor insurance through phone selling – then a radical innovation. More recently, the rise of “aggregator” price comparison websites has had a significant impact on consumer choice and the competitiveness of pricing – and this is an innovation where the UK has led the world. Recent decades have also seen the UK develop a thriving market for new types of business, with pet insurance being a notable example.
These stories illustrate the integral role that insurance has played throughout this country’s history – whether addressing the social needs of communities; underpinning economic transformation both at home and overseas; or striving to innovate to meet the needs of the consumer.
What’s more, in rising to these challenges, the insurance industry in the UK has thrived and prospered.
Challenges facing the UK over the coming decades
Let me turn to the immediate challenges facing the insurance sector, which everyone here today will be familiar with.
The current uncertainty around Solvency II is a real problem, and the government has fought hard in negotiations to deliver a package which works well for UK industry – supporting the sector’s role as a valuable investor in our economy and providing opportunities for UK insurers to compete overseas.
Let me assure you that it is our priority to preserve the successes that we’ve already had in negotiations and to work closely with EU institutions and other Member States to reach a satisfactory agreement on outstanding issues as soon as possible. Industry needs certainty to plan and invest for the future.
I’m also sure that the issue of flood insurance will be of great concern to many insurers and their customers; and you will no doubt have been keeping a close watch on the negotiations to agree a successor arrangement to the current Statement of Principles. The government’s priority is to seek a lasting solution that ensures affordable insurance bills for those at flood risk, but does not place unsustainable costs on wider policyholders and on the taxpayer.
I appreciate the efforts of industry and hope that we can soon establish an agreement that will settle this matter for the next generation.
This is not, of course, the only issue on which both government and insurers need to take a long-term view.
The United Kingdom, like other developed nations, faces a number of long-term challenges which are of direct relevance to the insurance industry.
Without promising instant solutions, I think it’s worth highlighting some the most important of these issues.
Firstly, there’s what many regard as the biggest challenge facing the developed world – demographic change. As with most European countries, the British population is ageing and will continue to do so over the coming decades.
Central projections from the Office for Budget Responsibility show the proportion of the population aged 65 and above rises from 17 per cent in 2012 to roughly 26 per cent in 2061. This reflects increasing life expectancy, declining fertility, and the advancing years of the demographically dominant baby boom generation.
The associated upward pressure on health spending, pension costs and social care costs will all have implications for the management of public and personal finances.
The second challenge is all about information. According to recent studies, 90 per cent of the world’s data was created within the last two years. Admittedly a great deal of it is complete rubbish. But that still leaves a vast amount of information that is potentially of great value to individuals, businesses and governments – especially given our increasing ability to collate and analyse data in real time.
The intelligence thus generated will enable public and private sector providers to personalise services as never before. For instance, the increasingly granular data on insurance risk is driving the individualisation of premiums, which raises difficult questions about privacy, fairness and access to insurance for higher risk consumers.
The third challenge is about rebuilding trust and confidence in the financial services sector. This has certainly been my number one focus as Financial Secretary to the Treasury, because the confidence that others have in Britain’s biggest industry is critical to our competitiveness and prosperity over the long-term.
For obvious reasons, the immediate focus has been on the banks – but insurance is an integral part of the bigger picture. With a business model that puts trust and integrity at its core, your sector is well placed to address this challenge. Individual firms will have a role to play in demonstrating that they can help meet consumers’ protection and insurance needs in a fair, clear and transparent way; but the new Financial Conduct Authority will play its part too, through earlier intervention and a more proactive approach to preventing consumer detriment.
The final challenge is about renewing and improving Britain’s economic infrastructure. From energy to transport to telecommunications, new hubs and networks are absolutely essential to our future growth and prosperity. After many years of neglect, it is essential that government takes the lead, but not every project will be funded from the public purse either in whole or in part, and so we must look to the private sector to fund and manage much of the necessary work. This will, of course, require expertise in the assessment and management of risk, as well as an appetite for long-term investment.
The sector and government working in partnership
The lesson of history is that insurance is at its best when innovating to meet the challenges of a changing economy and society. In the same way that the insurance industry has risen to meet the key challenges of the past, I am encouraged to see the industry playing its part in addressing the important challenges of our own time. If we can collectively find the best ways to maximise this contribution, it will be good for insurers, good for consumers and good for Britain.
In the last Budget the government published a strategy focused on strengthening the competitiveness and growth prospects of the asset management sector.
I am delighted to announce the government is embarking on similar work for the insurance sector, which will aim to promote the UK’s position as a leading centre for insurance; enhance our position as a leader in global business by driving growth in overseas markets; and focus on insurers’ contribution to long-term investment and savings in the UK.
We have been speaking to a wide range of firms across the sector over recent months to get your views and ideas, and you will hear more about this over the coming months. In the meantime we welcome a continuing dialogue with industry, and we want to hear your thoughts on specific ideas to drive growth in the sector.
As I’ve set out this morning, for me the insurance industry occupies a distinctive role in the UK – defined by a social purpose, at the core of the country’s internationalism, and always striving for innovation. These characteristics have been apparent throughout the sector’s history certainly, but they continue to endure today.
The economic and social challenges facing developed countries in the coming decades are by no means small; but nor are they insurmountable. Rising to meet them will require creativity, resilience, and a determined focus over the long-term.
I am confident, however, that working together – and with a common purpose – we can drive forward meaningful change; delivering outcomes consistent with your commercial success, but also those that advance the wider public good.
I look forward to working with you all in the months and years ahead.