Good afternoon, and thank you for inviting me to speak here today. It’s a pleasure to be speaking with such a prestigious organisation, and with so many leading figures in the Insurance sector…CEOs, policy experts and academics.
The Geneva Association and events like this today provide the opportunity to take a step back from and take a holistic look at the challenges that face the insurance sector.
We all know how easy it is to become absorbed by short term challenges…
A quarterly report…
A specific directive…
Or a difficult headline.
And of course the current uncertainty across the global economy is top of everyone’s list of concerns.
The ongoing crisis in the Eurozone continues to undermine confidence across all our economies, the UK included. And we will continue to work with our European counterparts to reach a swift, decisive and comprehensive solution to that crisis.
But at the same time, it is equally important that we discuss the longer term vision…the challenges and the opportunities that face the UK insurance industry over the next decade and beyond.
Looking at the macro-economic picture, it’s clear that whilst we are living through a period of sharp readjustment in Europe, we are only at the outset of a long and sustained period of growth in the emerging economies.
On the regulatory side, we face the prospect of years of reform to correct the failures of the last decade, and to make sure we embed a stable but competitive financial sector.
And facing a tough economic climate, consumers are unsurprising readjusting their spending habit…often reducing their demand for insurance products, or looking for new ways to access those products.
These are of course tough challenges for insurance companies, but they also represent opportunities for the UK insurance sector to capitalise on its world leading strengths.
The UK industry is already the largest in the EU, and third largest in the world after the US and Japan
Within the UK economy the industry has a vital role as an investment intermediary, managing 26% of the UK’s total net worth and 13% of investments on the London Stock Market.
It is also a major investor overseas…with around 30% of premium income coming from overseas business, from both life and general insurance business.
So whilst the sector has withstood the crisis well, this is no time to be complacent.
It is vital that across the financial system, as markets, products and services evolve, regulation changes to keep pace.
Regulatory reform is essential to ensure that the financial sector does not jeopardise the stability of the rest of the economy.
The UK simply cannot afford a repeat of the last crisis.
And reform is equally vital to restore the trust of consumers and taxpayers that had been so severely let down by financial institutions, politicians and regulators. Whether that was the failure of macro- and micro-prudential supervision or the mis-selling of products, consumer confidence has been eroded and the financial strength of the sector has been affected.
But at the same time, regulation has to be proportionate, evidenced based, and has to reflect the unique risks and characteristics of the insurance market.
This is the approach we have taken in our reforms to abandon the failed tripartite regime of supervision in the UK.
We are establishing a permanent Financial Policy Committee inside the Bank of England to monitor overall risks in the financial system, spot dangerous inter-connections and stop excessive levels of leverage before it’s too late.
We are also abolishing the Financial Services Authority in its current form, and creating a new Prudential Regulation Authority with a focus on micro-prudential regulation. It will bring judgement to the vital task of regulating the soundness of individual firms that manage risk on their balance sheet, particularly banks and insurance companies.
But we recognise, of course, that the business model of an insurance company is different to that of a bank. This is why we are proposing to provide the PRA with a specific statutory objective for its insurance responsibilities. Insurance regulation will not take a back seat to deposit-taker regulation in the PRA.
The framework will also ensure the effective regulation of ‘with profits’ business.
Furthermore a new Financial Conduct Authority will oversee the conduct of financial services firms, the operation of markets and the protection of consumers with new powers to ban the sale of toxic products.
Of course, financial services are a global industry and regulation has to reflect that fact.
I particularly want to commend the work of the Geneva Association in feeding into the International Association of Insurance Supervisors work and shaping the debate on insurers and systemic risk.
We don’t believe that core Insurance activities are systemic but as we saw with AIG, there are instances where the Insurance sector can become closely intertwined with systemic problems in the financial system.
Of course that work also ties closely to the important role of the new European Insurance and Occupational Pensions Authority.
We are keen to work with EIOPA as it develops, and ensure that it delivers higher and consistent standards of supervision across the EU, and most importantly of all, helps create a level playing field across Europe.
By doing so, EIOPA can take a major step in completing a single market in insurance, creating new international opportunities for the UK sector.
There is also an array of regulatory reform initiatives at the European level. None more important for the Insurance sector than Solvency 2.
We have been a strong supporter of Solvency 2. I firmly believe that it will help support financial stability in the sector and across the financial system through better risk-based capital requirement s and its focus on strong risk management in firms.
The UK has also ensured that Solvency 2 protects insurers’ role as a stable, long term provider for infrastructure through the “matching premium”. Indeed, as the Chancellor announced last week, we will also set up an Insurers’ Infrastructure Investment Forum to explore ways of attracting debt finance from the insurance sector in our country’s infrastructure needs.
We have also pressed for consistent and proportionate implementation of Solvency 2 to ensure a level playing field across Europe, whilst keeping our markets open to international competition and expansion.
That brings opportunities for UK firms to expand to new markets, to innovate and provide new products, and help lead a UK recover by exporting our insurance expertise and services.
Many UK firms already have a global footprint, and importantly have a strong presence in some of the fastest growing world economies. It is absolutely right that insurers look to long term opportunities in mature economies such as the US and Europe, but it is equally important that UK companies look to Emerging Markets.
We are committed to supporting our firms in that ambition.
But equally, there are opportunities for new growth and new product development here in the UK.
In particular, opportunities to respond to the challenge of technological innovation and changing consumer behaviour.
For one, we know that increasing sophisticated technologies will increase the capacity of insurers to collect more granular data on risk, and help insurers improve risk modelling. It has the potential to allow better risk pricing and customer differentiation, leading to a better deal for low risk customers.
That said, we are also right to be wary. There is a risk that it could cause more segmentation in the market, reduce the tolerance for risk sharing, and potentially cause a shift with some consumers being priced out of the market altogether, leaving them completely uninsured.
Separately we are all familiar with how the internet is changing how consumers interact with the market place.
Empowering customers is also important as they increasingly interact with the market directly and independently. Individuals are already more likely to buy general insurance products themselves, rather than with the advice and guidance of an intermediary.
The number of those using a comparison website to shop for motor insurance has gone from 1 in 4 in 2007, to 9 in 10 today. But comparison sites are also an increasingly important distribution channel in markets for other products. We expect to see their expansion in the protection products market where they are already beginning to be used for life insurance.
Self-service over the internet means consumers need access to the advice and support which will help them make the right financial decisions independently.
This presents a major challenge to how the insurance industry interacts with and promotes its products to consumers.
It’s simply one part of a sweeping trend of consumer empowerment.
One that puts the consumer at the very centre of the financial system
And a trend that the Government is fully supportive of as demonstrated by the new Financial Conduct Authority, but also by our measures to increase consumer capacity to engage with the market place.
Consumer focused reform
But at the same time we know that for many consumers, the financial market is a confusing, and often intimidating place.
We want to ensure that consumers have the skills and knowledge to navigate the financial services market with confidence. Helping them take responsibility for their financial future.
One side to that is building confidence and trust in our financial services through regulatory reform.
But the other side to promoting a culture of financial responsibility, is empowering consumers to ensure the are equipped to engage with the system in an educated manner.
It’s the kind of culture that was lacking in the years preceding the crisis where one in four households had no savings at all.
And UK household debt was almost 100% of GDP, compared to around 60% in Germany, and 50% in France.
We are committed to bucking the trend, encouraging lower and middle income households to start saving.
These aren’t trends that can be fixed overnight, but I am personally committed to ensuring that as a Government we rise to the challenge.
That’s why earlier this year I launched the Money Advice Service to offer free and impartial guidance on financial matters. In particular, its Financial Healthcheck provides invaluable help to families to help them identify their financial needs and find out where to get further advice.
Whilst Money Advice Service drives up demand, simplified products and insurers’ own actions can deliver the supply side.
That’s why we are also leading the way to ensure the market is providing products that people can understand, such as Junior ISAs. It’s why we set up the steering group, chaired by Carol Sergeant, to develop simple products for the market including in deposit savings and protection insurance. It’s an initiative that will aid access to the savings market, and help families take action to plan their financial futures for the first time.
But we also see that there is scope to encourage savings through employers.
It’s why we are introducing a new duty on all employers to automatically enrol qualifying employees into a workplace pension scheme from next year.
And furthermore, why we are launching the National Employment Savings Trust (NEST) to provide a low-cost pension scheme for employers who do not currently have any workplace provision. We expect that these reforms will eventually lead to up to 8 million people newly saving or saving more into a pension.
We realise however that it may be difficult to for small businesses to implement reforms immediately, which is why firms with less than 50 employees will be given more time to prepare for these new responsibilities.
Of course the Insurance sector is closely intertwined with the country’s savings habits, and we want to work closely with the industry to think of innovative means to encourage prudence and personal responsibility for finances.
I also encourage the likes of you here today, and the Geneva Association to bring the same level of focus to consumer issues as we all do to macro issues such as stability.
Because we all, Government’s and insurers, face significant challenges in society that will require ever closer cooperation and innovation.
For instance the line between public and private sector provision of social insurance and protection always has, and always will shift.
This is partly a result of changes in the pattern of state welfare protection, but also as a result of emerging social needs such as long term care.
How far insurers can step up in to this space however, is not always obvious, even when the State’s role in such a market is made absolutely clear as a foundation for a viable market.
But these are not insurmountable challenges.
In the UK we already have a strong track record of working together to tackle some of the biggest and most difficult insurance risks that we face…from working towards a solution on flood insurance, to our work on managing compensation for those affected by mesothelioma.
I believe that we can together tackle these long term issues.
Of course, in the near term managing the risks from global economic uncertainty, and responding to EU driven regulatory reform will pre-occupy and consume much of all our time.
But we must also keep an eye on the long term vision.
That means working to ensure that UK firms continue to engage and expand in the UK market, but also develop growth opportunities abroad.
And it means catalysing the kind of innovation, service delivery and product development to restore consumer trust and deal with society wide challenges such as savings and social care.
Industry engagement will be critical to delivering that vision, and the UK Insurance Forum, as well as of course the Geneva Association, will play a vital role in encouraging the industry to think about the more strategic issues I have mentioned today.
I look forward to working with you all in the years to come to work towards that vision.