I thank the Actuarial profession for inviting me to such an important event, fittingly here in Brussels at a time when the future for Europe is as unpredictable as at any time in the last half century.
As I see it, insurers contribute in three distinct ways to our society today. Firstly we offer our customers the ability to deal better with unpredictable events in their lives – helping private individuals and companies to manage their risks in a world that is increasingly complex and uncertain. And with an ageing population and governments challenged by austerity this is becoming more and more important.
The second is to invest the assets we hold on behalf of our customers to generate economic growth, either by providing capital to well run companies or by investing in the development of long term infrastructure, the roads, technologies and support systems which make an economy succeed. And again European governments are seeing this role as vital if recovery is going to happen any time soon.
Our third role is as an industry sector in our own right. Contributing billions of pounds and euros to the treasuries of Europe, and potentially a source of significant export earnings and growing employment opportunities. The European insurance industry stands proudly as a global leader.
The challenges that we see in Europe;
• Low growth
• High levels of government and personal debt
• Low consumer confidence
• Ageing populations
• A growing divide between the ”haves” and the ”have nots”
• And the powerful rise of the emerging young economies
Difficult questions which demand strong and thoughtful leadership from our politicians, on both sides of the Atlantic.
Today, I’m going to use my time to expand on our social purpose: To think beyond boundaries and to set out how we will plan for our future.
• What are the trends that will shape our products and services in the years to come?
• How does our industry need to change to earn the trust of our future customers
• What do governments need to do to allow solutions to emerge
• And what will the social contract between governments, citizens and industry look like?
I hope that you have plenty of questions when I finish – and that I leave you with one or two interesting thoughts as you head home from what has been an excellent conference.
Chapter 1: the story so far
Before we look to the future, it is worth saying a few words about the past. The history of the UK insurance industry, which began in the coffeehouses of 17th Century London is well known to most of you. Our industry has evolved as our role in the world has changed. From its origins alongside the beginnings of our maritime heritage, through the changes brought about by the industrial revolution and the influence of Britain as its empire grew. At the start of the 20th Century European Imperialism was at its height. A hundred years later it seems as though the world has shifted on its axis. The UK has declined as a world power. Europe faces challenges economically and socially. And in the meantime the Asian economies in particular continue to power ahead. And at the same time, as we in the developed world relied on debt to extend our economic growth, and government spending to maintain employment and investment in our economies, the Asian countries continued to fuel their growth through a savings based economy.
So when the financial crisis came, they were far better able to survive it than we in the west. Insurance has proven resilient however, particularly through the financial crisis. Demand for our services has broadened, particularly in the general insurance sector, as increasing complexity and new emerging risks, for example terrorism, new energy generation technologies and new social behavioural norms have created opportunities for product innovation to which our industry has responded. And the capital position of the sector has proved robust on the whole.
Our reputation though has suffered alongside other parts of the financial services sector. The man and woman in the street do not see a difference between banks and insurers. I will return to this subject later.
Chapter 2: the trends
And first I will talk about what the independent Office of Budget Responsibility have identified as one of the greatest threats to the UK’s fiscal sustainability in the next 50 years: that is of course, ageing. We are living longer, of which I know you are all very aware. I know of several insurers, and you may be among them, who are now modelling pensions and retirement savings products on the assumption that customers could live to be 120 or 125 – and with very different patterns of retirement. With men and women living on average 30 years longer than they did 100 years ago, by 2100, people living to over 100 years old will be the norm.
How will we ensure that mankind’s greatest achievement of prolonging life in this way doesn’t lead to poverty for millions of people, and health and social care systems which cannot cope with the increased demands being made of them?
The current low growth and low interest rate economy means that the conventional approach to turning capital at retirement into income, the annuity, is seen by consumers and commentators as very poor value. This is not a comment on the industry so much as a reflection of a set of economic circumstances which are very unlikely to change anytime soon. But even when long term interest rates were more supportive of annuitisation the arithmetic was stark, £1000 of retirement capital is needed to buy £1 per week of income. We need to find a way to encourage more people to save more for longer, at a time when the outlook for returns is uncertain at best. And at a time when many have high levels of personal debt or face the risk of unemployment.
For me there are three parts to the answer:
Firstly the industry, our industry, needs to look with fresh eyes at the pension savings solutions we deliver. For the individual who we are trying to persuade to defer their gratification by saving now to consume later, we need to deliver a pensions solution in which
• charge levels for administration are seen and understood to be value for money
• investment options are transparent and understandable and relevant to the saver
• an approach to communication and engagement encourages savers to understand and track how their retirement savings are building
• an approach to the process of retiring offers more flexible solutions and prepares people well in advance for what is to come and the decisions they have to make
• post retirement options can adapt to the many needs which the generations to come will have as they face new challenges in the area of social care and inter generational transfer of wealth
Pension reform is right. Turner was right. Auto enrolment is right. But the current piecemeal approach to tinkering with the components is wrong and will not achieve our goals. We need a holistic raising of the bar and I believe the industry has the skills to do that.
Secondly we need to start now to build greater financial capability in all members of society. At schools, in colleges and universities, in the workplace, in clubs and charities, around those helping people deal with debt, and at every significant lifestage and life event. Working in the UK with organisations such as the Money Advice Service and the Citizens Advice Bureau we can help people to understand how to stay in control of their money, and how to use that control to take decisions which will allow them to stay in control of their lives, and help the people they care about do the same.
I have been actively involved in this area for over a decade now. The review I did in 2007 still holds good, and the work done by the FSA at the start of this century is still ground breaking and world class. Let’s re-establish Europe’s leadership in this critical area and push on to make financial capability a life skill.5
Finally politicians need to be much more honest about what the state will be able to provide in future. The OBR is right. The UK state will not be able to afford to provide pensions and health services and care services to its ageing population at the level people will need. Until that message lands the motivation for the individual to save more for longer will be half hearted at best. I had the privilege of spending a day with Tidjane Thiam last week in his new role as Chairman of the ABI. He made the point very strongly that the savings culture in Asia was not genetic, rather it was a result of the Asian peoples being very aware of the fact that they had to save if they were to be able to live in their old age in the way that they would want to, and if their families and loved ones were to have any kind of level of financial security. This isn’t rocket science but it needs all the components to work together and it needs a stepping up of the quality of the response across the board.
While Government’s face tight fiscal budgets and are rowing back, and in the aftermath of a financial crisis when the regulators were seen to be at best, off the pace, the political appetite for regulation continues to grow. The pendulum will continue to swing in this direction for a while longer and the consequences are far from clear. In the UK, the FSA has been split into a ‘twin peaks’ regime, with separate regulators for prudential and conduct regulation. In Europe, the regulatory regime is sectoral – with regulators for banking; insurance and pensions; and securities and markets. I will say more about European regulatory trends in a moment.
Regulation is a key enabler to the way we do business. It supports our efforts to put the consumer at the heart of the insurance industry. The new regulatory regime in the UK, which will come into effect next April, presents us with a chance to accelerate our efforts to establish the insurance sector as a trusted partner of UK citizens as they try to navigate their way through the difficult economic and socially challenging decades ahead, at a time when of course consumer confidence in financial services remains low.
At the ABI we are determined to engage with the FCA and the PRA with energy and open minds to ensure that this opportunity is grasped. With Government provision contracting, good outcomes for consumers will be more likely if policy and regulation are well aligned. That is why the ABI wants to see Government and Regulators working together so that regulations are set within the context of the wider public policy agenda. Public policy proposals and regulations should go hand in hand, and stand the test of time through five year Parliaments, four year Presidencies and Coalition politics, putting the consumer’s long term interests first.6
We also need to see insurance experts at the very highest levels of the Prudential Regulation Authority – recognising the different nature of our long term business models. Ensuring that focus is not just on the banking sector, and that when decisions are made, someone who understands insurance inside out, is at the table shaping our future. An industry such as ours cannot be well served by regulators if we are an afterthought, or the subject of ill thought through regulations copied and pasted from different sectors.
Two other trends, which perhaps go hand in hand, are the increasing incidence of natural catastrophes and the continuing question of how significant and how far reaching is climate change. At the ABI we were part of the initiative to create Climatewise, the organisation now at the centre of the industry’s response to these issues. I’m speaking at another conference on this subject lat this month with John Coomber who has long been recognised as an expert in this field, but for now I will only point to the advances in actuarial work which are allowing us to use more sophisticated risk models to understand the impact on insurance pricing, and to the investments in defences and planning which will help to mitigate the effects allow society to react quickly to these disasters as they occur.
In the UK for example, we work closely with the Environment Agency to map flood risk, and continue to be locked in intensive discussions with Defra and HMT, on how best to keep protecting consumers from the costs of flooding. So that cover for those in high risk areas remains accessible and affordable and the model for property insurance provision is sustainable and can evolve with the changing environment which I believe we will face in the UK.
Technology too is helping in the motor market. Motor insurance is effectively a compulsory insurance. Pretty well everyone needs a car for some part of their lives, either related to their job or their family lives. So everyone needs motor insurance. This was one of my first lessons when I joined the ABI, that the general insurance has a massive relevance to society in the 21st Century. But that relevance brings with it responsibility for an industry which is such a vital part of making the world work effectively and safely. The introduction of black boxes in cars, known as ‘telematics’, which monitor driving, can help to bring down premiums especially for young drivers if and when they can demonstrate they are safe road users. But at the same time, this ability to provide an individual price based on an almost completely accurate assessment of the risk an individual brings to the ”risk pool” challenges the very fundamentals of how the insurance model works. This is a subject we as an industry will have to return to as society adapts to the power of new technologies.
The final issue I will highlight finds its roots in where the financial markets find themselves after the recent seismic events. Bank of England interest rate data goes back to 1694 – before the formation of the UK in 1707, making it one of the world’s most complete economic data sets. On a 300 year view, our current low interest rates, may be signalling a period which has not been seen for centuries. In the first hundred years of our data, the rate barely moved from a level of around 5%, Since 1800, when demand for capital soared with the industrial revolution, the rate has fluctuated far more widely. From the mid 19th century the Bank began moving the rates several times a year and that has largely been the pattern since. An extended period of low interest rates should cause us to assess what impact they might have on our business models and our proposition to savers.
One point I want to make up front, of which there is much misconception, is that a low interest rate environment does not mean that the value proposition of insurance as a savings industry is entirely undermined. We need to recognise this changed environment for saving. To educate potential savers about the value of low but safe gains, at a time of stable or low prices. Be cautious about offering guarantees. Assess carefully the implications of legacy products with guarantees. But with this, we must also rethink charging structures: charges naturally stand out more starkly in a low return regime. Annuities too as I’ve already discussed are at low levels.
How do we rebuild this value proposition for savers bombarded by messages that the low interest rates make saving barely worth it? We need to start from the basics: putting money away little and often; making gains that are low but safe. Not over promising on advertising and under delivering at the end. We need to start from the social benefits of insurance: and our core role of protection and managing risk. We need to emphasise the peace of mind which can be brought to families when the unexpected is adequately provided for. We need to look at products can be made more adaptable to people’s needs in the 21st century, rather than asking them to adapt to a product suite developed for different times.
In summary then, changes are happening in many dimensions in our sector, economic, social, regulatory and at the level of the human condition itself. Solving for ”a sustainable society” is the challenge at the door of the actuarial community.
Chapter 3: our asks
But we can’t solve this alone. The industry is a big part of the answer, but governments and regulators can help make the puzzle a little simpler, by delivering a better more stable policy and regulatory environment. The challenges we must address with Governments and regulators include:
• On ageing: making pension reform work; getting clarity on long term care policy; supporting our Code of Conduct to help people shop around for their retirement income; and focusing on getting people and families saving and planning for their future – there are signs of the broad consensus between parties breaking down….this is a massive distraction at a time when there is so much work to do to make the current policy direction a success.
• On the economy: speeding up our work with the Treasury on the Insurers’ Infrastructure Investment Forum. Ensuring Solvency 2 is implemented in a way that doesn’t increase regulatory barriers to infrastructure investment, so that insurers can invest more of our £1.8 trillion in assets in everything from hospitals to railways;
• On Europe: allowing the industry to continue to price based on risk. The pool of factors which paint a more accurate picture of risk is being reduced – and we must ensure it is kept at a level which paints as complete a picture as possible. We need to help the legislators understand that the insurance pricing model promotes fairness in pricing rather than the view of some that it is discriminatory. We must ensure that factors such as age and disability are kept out of the scope of future directives.
• And at home: we are working with the Government to flush out unnecessary extra costs driven by the UK’s growing compensation culture. Reducing the £2 billion a year spent in whiplash claims or disingenuous ‘slip and trip’ falls. The £1.33 billion bill faced by the NHS last year included £230million in legal costs alone. For every £1 we pay out, an additional 40p goes to claimant’s representatives. Independent medical boards and the banning of referral fees will be key to reducing these costs for honest customers – as will our fraud initiatives such as our industry funded specialist police unit that is clamping down on ‘crash for cash’ scams.
• And there is a further ask of governments. The pressure on the insurance industry to ignore the outcomes of their risk pricing models and charge a premium which is seen as ‘fair’ from a social perspective is growing. This moral pressure to cap premium outcomes is being felt in areas as diverse as motor cover for young drivers and flood cover for uninsurable properties.
The current economic environment will only intensify this pressure. We need politicians to understand that price controls are not the way to deal with a problem which is caused by the cost of claims. Reducing those costs at source is the sustainable solution for society.
Chapter 4: Europe
Given that I am speaking in Brussels, it is perhaps only fitting that I make a few comments on how some of the structural effects of the Eurozone crisis might play out – and what it might mean for insurers. The moving feast of European and domestic social politics means these are uncertain times for insurers, and even more uncertain times for insurers in the UK. The political deadlock and inability to drive Solvency 2 through is a serious setback: representing an ebbing of power away from European institutions, back into the hands of national regulators. It represents a blow to the Single Market.
From a UK perspective the uncertainty surrounding the UK’s position in Europe and votes about the EU budget in Westminster, undermine our influence with other member states. The Commission’s recent proposals for a banking union – behind which there is much political will – must surely carry consequences for the regulation of insurance. In short, banking regulations often set the precedent. Banks offering insurance will be drawn into the supervisory sights of the European Central Bank. Eurozone national authorities will be drawn into close co-operation for banking purposes. And it would be surprising if national authorities were not then drawn together for insurance purposes too. As we have seen both on a global level and at home, there is an uncomfortable tendency for thinking on insurance regulation to find its origins in a banking framework – and this could well be the case several years down the track following a European banking union. Turning to the position of British insurers, the future looks even more uncomfortable.
The Commission’s proposals safeguard the Single Market. But, I have to ask, whether the Single Market in financial services will retain its integrity, if some, but not all, of the Single Market’s members are also part of a tightly co-ordinated banking union? This is a debate within which we will play an active role – for it is set to shape our environment, along with the other variables in the puzzle of the new normal insurers face.
Chapter 5 : so what?
So where does this leave the insurance industry? As you sit on your train back to London, should you be reflecting on a career change? I don’t think so! Our industry will continue to play our part to support a successful economy and society;
As employers, as responsible investors in the firms which will drive the growth we need, and as a source of finance for governments who need the capital to develop the infrastructure we need to compete globally.
We will continue to ensure that the affordability and availability of insurance is preserved through innovative product development, removing unnecessary costs in the system, and continuing to focus on the customer at every stage of the process.
We will focus on how society will cope with the financial challenges of life after work: my 5 point plan on creating an effective pensions and in retirement marketplace are the keys to this.
Finally, there is the changing consumer. The world of our customer never stands still. It has changed beyond recognition since I first became an actuary – not just the developments in technology (and the development of social media is changing the environment in which we operate completely ) but also the attitudes and expectations of individuals today, and the personal challenges they face are of a totally different type and a different order. How will consumer attitudes, behaviour and buying habits change from here? And what will this mean for our industry?
My final comment is on reputation. As I said earlier, (and in a number of discussions last week with media and consumer representatives I was struck again by how strongly felt this is) the insurance industry is seen as opaque and not to be trusted in its dealings with customers. All the innovation and development will be for nought if we cannot establish that we are to be trusted. For me, this comes down to creating an effective marketplace, and one where conflicts of interest are identified and well managed, as a matter of course. How do we do this? Here are some ideas. First…enable consumers to be effective. Give them the information they need to make choices. Give them the guidance they need to make those choices. Transparency is key to this. Secondly, make sure the information provided is understandable and easily accessible. Thirdly, make it easier to exercise choice (we can learn from discussions going on in the banking and energy sectors currently). Fourthly, ensure the consumer has a voice within the industry. And finally, where things go wrong make sure the redress system is quick and effective.
We must ensure that consumers are not put off by the basics going wrong when they interact with us. And as actuaries, where do we stand on transparency? Are we a force for good or evil? On the one hand, we love complexity. Our big brains have had a big influence in designing the complex structures of the past. But on the other, I have always thought of actuaries as people who could interpret the complex, and make it accessible to many. The actuarial profession needs to have a voice on the issues I’ve discussed today. As I’ve described it, we are faced a with a highly complex multi variate set of economic and social equations which we have to solve for ‘a sustainable society’. There is not a more important task for financial services professionals today, and the actuarial community is well placed (perhaps best placed) to attempt to solve it. But I feel we are too often silent on these issues. We have a vital role in today’s complex marketplace. And we are a pivotal part of the insurance industry. We are an industry that is in the business of protecting people and their families – that is where our social purpose rests.
Since the creation of insurance as a product, that purpose has grown – encompassing the broader role we have taken on as investors in the world’s economies. And as these trends take shape and their influence is felt – it has the potential to grow further as we adapt and take charge of our role within this more complicated, more uncertain, more unstable planet.
I truly believe this is a great industry to be in. If we do our jobs well we can change people’s lives. And I think we have some work to do to promote our work more, and to promote and explain that social purpose to consumers, to Government, to our new regulators, and to the media. And even to ourselves and potential new recruits. To ensure that as a big employer, we attract the best talent, and grow the potential of our employees. 100 years ago there were 800 actuaries compared to today’s 10,000. There were 7000 Chartered Insurance Professionals to today’s 100,000. We have an eventful and exciting past – and an even brighter future. We will be waking up tomorrow to find out who will be the 45th President of the United States, despite the rise of China, still the dominant global superpower in our developed world. We will all be wondering what impact this man will have on the challenges I have been discussing today. What legacy will this President leave behind in four years’ time?
However the next chapter unfolds, I have every confidence that our industry can grow to be the global trusted partner our society deserves. Our story has only just begun, and with our commitment to placing the consumer at the heart of our activity our opportunity is clear.