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Good afternoon, and thank you for inviting me to speak here today. It’s a pleasure to be speaking at this event, with so many leading figures in the Insurance sector… CEOs, Managers, and young executives who are forging their careers at places such as here at Lloyds.
The Institute provides the ideal forum to analyse and debate the future of the Insurance sector. Not just over the coming year as we confront continued economic uncertainty, but also the coming decades as the industry rises to long term challenges.
We all know how easy it is to become absorbed by short term challenges…and we know insurers had some tough circumstances to contend with in the last year…
Rising levels of insurance fraud, especially in relation to personal injury claims…
Large catastrophe and man-made losses exceeding $100bn…
And of course the uncertainty across the Eurozone remains top of everyone’s list of concerns.
The ongoing sovereign debt crisis continues to undermine confidence across all our economies, the UK included.
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…
To capitalise on a long and sustained period of growth in the emerging economies;
The prospect of years of regulatory reform to correct the failures of the last decade;
And changing consumer behaviour, as consumers reduce demand for insurance products in difficult times, or look for new ways to access those products.
These are tough challenges for insurance companies, but they also represent opportunities for the UK insurance sector to build 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.
And whilst the sector has withstood the recent crisis well, this is no time to be complacent. Consumers need to have confidence in financial services if they are to buy products and take advice, whether it is motor insurance or a sophisticated investment product. The banking crisis has affected consumer confidence and whilst insurers might take reassurance from the fact that it was a banking crisis, the reality is that for consumers it was a financial sector crisis and they don’t discriminate between them.
So regulatory 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. As EIOPA President, Gabriel Bernardino, said in December last year, we need a “paradigm shift” to restore confidence in Europe’s financial services.
Consumers and taxpayers have to be confident that financial services do not jeopardise the stability of the rest of the economy. 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.
The interim FPC is also considering potential macro-prudential tools that the permanent body should have available for use in the banking sector. The FPC will note the particular characteristics of the insurance industry when they consider which, if any, macro-prudential tools should be applicable to the insurance industry.
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.
Confidence is about more than financial soundness of firms, people need confidence when they buy products too.
A new Financial Conduct Authority will oversee the conduct of financial services firms, the operation of markets and the protection of consumers. It will have new powers, including the power to ban or restrict the sale of toxic products, and the ability to make public the fact that disciplinary action is being taken against a firm. The FCA will also have a strong mandate to act on competition, a first for a UK financial services regulator.
These are fundamental but necessary changes to how we regulate UK financial services, and the insurance industry. All these changes will be sat out in the Financial Services Bill, which will be introduced in to Parliament shortly, and I am grateful for the contributions from many firms represented here today to our consultation on reform.
Action which includes abolishing “no win no fee” agreements to ensure that defendants, including insurers, are no longer liable for these additional costs. The ABI has already said that as a result motorists can look forward to cheaper insurance.
We have also banned referral fees which should help towards curbing the “compensation culture”.
And we are working with industry to ensure flood insurance remains widely available in the future, and that consumers are clear about what they can expect from their insurer, and from Government.
As you know well, creating confidence is not the sole prerogative of regulation or governments. Industry has a role too.
Common to these regulatory changes is the drive to improve the standards that underpin firms across the industry. This is particularly relevant to you at the Insurance Institute of London, and in your efforts to promote professionalism among practitioners. We are encouraged by how we are already starting to see evidence of industry-led initiatives to improve standards As you know, initiatives to improve standards are not the sole preserve of the insurance sector as there is a renewed interest in professionalism across financial services as a whole.
Such work is consistent with just the sort of change discussed in the recent Parliamentary Joint Committee report on financial regulation reform. It also sends a clear message that firms that make up the insurance industry are taking an initiative to improve market trust and confidence in the public interest.
Whilst prudential supervision of insurance will be the responsibility of the PRA, it will be working within a framework created at a European level.
The UK has been a strong supporter of Solvency II. I firmly believe that it will help support financial stability in the sector and across the financial system through better risk-based capital requirements and its focus on strong risk management in firms.
And by providing a harmonised regime across Europe, Solvency II should increase cross border competition and create new opportunities for UK firms within the Single Market. This will in turn deliver increased efficiencies and reduced compliance costs to the benefit of both firms and consumers across Europe.
As you are aware, the Commission recently issued a consolidated level 2 text, the contents of which reflect a huge amount of negotiation and work by the Treasury, the FSA and the industry on a very wide range of issues.
Collectively, I believe that we have gone a long way to deliver on the key priorities that we agreed with the UK insurance industry at the outset of the level 2 negotiations. A key priority was to reach an acceptable agreement on the treatment of annuities, and I am confident the current long term guarantees package will work for the UK industry.
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 at the end of last year, an Insurers’ Infrastructure Investment Forum has been set up to explore ways of attracting debt finance from the insurance sector in our country’s infrastructure needs.
We have also achieved significant improvements in other priority areas, such as the treatment of capital and the calibration of the standard formula, in particular the inclusion of geographical diversification in non-life catastrophe risk.
We believe the level 2 agreement is now largely stable for these issues. As well as heading off any amendments that could affect or alter the implementation of the level 2 agreement, our priority is to secure an acceptable agreement on transitional arrangements for third country equivalence.
We have to take proper account of those third countries working towards equivalence so that UK or European firms are not put at a competitive disadvantage.
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.
International competition and opportunities
Many UK firms already have a global footprint, and importantly have a strong presence in some of the fastest growing world economies.
With break neck growth in the likes of India, China and Brazil, it is absolutely right that we support our firms to capitalise on opportunities in emerging economies.
At the same time, we also have to ensure that regulation is proportionate, and that European Insurers are not unfairly discriminated against compared to international competitors.
The work of the International Association of Insurance Supervisors, and the contribution made by bodies such as the Geneva Association to questions of systemic risk, are vitally important in that respect.
The conclusions of that analysis will have a profound impact on the regulatory landscape for Insurers in the years to come, as we already see with debates on recovery and resolution arrangements.
These are substantial challenges on the European regulatory front, and a substantial challenge for EIOPA as it grows into its role and builds its reputation.
We are keen to work with EIOPA in that ambition, and critical to its success is ensuring that it delivers high and consistent standards of supervision across the EU.
That means implementing Solvency 2 consistently across Europe to ensure 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.
Of course, in similar spirit, we have been working hard to level the playing field for UK firms when it comes to insurance tax, and in particular, our reforms to the taxation of foreign profits.
In particular, we have listened to the industry’s concerns over the compliance burden and the tax barriers to restructuring for optimal capital efficiency under Solvency II.
In December we announced details of major changes in our approach to the taxation of foreign profits which reduce those burdens, and provide flexibility to UK headquartered groups making Solvency II related cross-border restructuring easier.
We are committed to creating the most competitive tax system in the G20 for our businesses and for our insurance companies.
Together with branch exemption introduced in the Finance Act 2011, our reductions in the corporation tax rate, and our work to rewrite the life tax regime, we are ensuring that we continue to attract the most innovative, successful and ambitious businesses and insurers to the UK.
Because I firmly believe that there are great opportunities to seize on new markets, promote technological innovation, and capitalise on changing consumer behaviour to drive the industry forward here in the UK.
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…and how Individuals are already more likely to buy general insurance products themselves, rather than with the advice and guidance of an intermediary.
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, and by the action we have already taken to support consumers in the Insurance sector.
These are all long term challenges that require long term engagement with the Insurance industry.
Of course, in the near term managing the risks from global economic uncertainty, and responding to regulatory reform will pre-occupy and consume much of all our time.
But we must also keep an eye on the long term vision.
It means ensuring that UK firms have the opportunity and build the ambition 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 wider challenges such as savings and social care.
Industry engagement will be critical to delivering that vision, and I am sure the Institute here 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.