As the politicians set out their stalls for the party conference season, Insurance Times asks what they have to offer the insurance industry. Our survey of the main parties opens with a long, hard look at ruling Labour’s record
Put Gordon Brown in a room full of insurers and brokers and he’s unlikely to come out smiling.
The prime minister and his predecessor Tony Blair have presided over 12 years of New Labour rule that have seen the economy in near meltdown, brokers strangled by red tape and flood defences crumbling.
As Labour gathers in Manchester for what could be its last conference in government, Insurance Times asked industry leaders for their verdict on the party’s record. Has the Labour party finally shed its anti-business image – or can things only get better?
Since the financial crisis, regulation has been the most pressing item on the political agenda. But there are a number of other areas – including, crucially, spending on flood defence – where the insurance industry is at the mercy of ministers. The overall verdict on New Labour is that while there have been a few notable successes, these have been the exception.
The chief executive of Broker Network, Grant Ellis, offers a typical broker view of the party. “I’m not a fan of New Labour,” he says. “The pretence at being ‘business-friendly’ is just that: pretence. Labour believes in a big state – I don’t. It surely can’t be healthy that the state employs close to half the population – it’s not real nor is it sufficiently accountable. The number of quangos is evidence of that.
“Labour has also wasted the strong balance sheet it inherited and the revenue the country has generated since. And if that wasn’t enough, it has introduced a level of spin that appears to make it acceptable to tell lies to the electorate. I will be very glad to see the back of Labour, but fear we’ll be paying for its mismanagement for many years to come.”
The report of the Insurance Industry Working Group, published in July, gives an insight into the Labour government’s view of insurance in the future. With industry high-ups including Aviva’s Andrew Moss and Richard Ward of Lloyd’s sitting at a table with the chancellor, Alistair Darling, the final report outlined a vision of an insurance industry that operated almost like a private welfare state.
At the behest of the politicians, the report looked at how the private sector could contribute to areas such as long-term care for the elderly, which will become an increasing burden on the public purse as people live longer. It talked of a “partnership between the insurance industry and government to better manage risk in society”, and called on the industry to educate and offer products to those groups of people currently excluded from financial services.
In return, there were hints of payback, with talk of “encouraging capital flows into the UK insurance industry by ensuring its competitive position in the global marketplace is maintained and enhanced”. Read: tax breaks. But the general feeling is that, with this government in its dying days, the report is barely worth the paper it is written on.
So, what would a Labour government do for business in the unlikely event that it won the next election? The answer will become clearer over this week, as the party attempts to offer a coherent manifesto at its annual conference. For many in the insurance industry, it may already be too late.
Labour’s record on regulation is poor, particularly for the intermediary sector. Back in 1997, when no one had ever heard the term “subprime”, Labour, fresh from unprecedented election success, announced plans to build on a Conservative idea to create a “super regulator”. In 2000, the FSA was born.
In the same year, the General Insurance Standards Council was launched as a voluntary regulatory body for the general insurance sector, in response to the government’s indication that it preferred voluntary self-regulation to statutory measures.
All this changed the following year when, in November 2001, the Treasury announced plans to hand the regulation of insurance intermediaries, mandated by the European Insurance Mediation Directive (IMD), to the FSA. In January 2005, the FSA assumed responsibility for regulating insurance brokers – and many have rued the day ever since.
Barbara Bradshaw, chief executive of the Institute of Insurance Brokers, says: “Soon after Labour came into power, the abolition of the Insurance Brokers’ Registration Council (IBRC) paved the way towards a single financial services regulator, which ended up with too wide a remit.
“The FSA has failed to control big financial institutions while imposing disproportionate financial and administrative burdens on smaller firms. Insurance brokers have been saddled with huge compliance costs through gold-plating of the IMD and are now liable to pay for bank failures under an ill-conceived compensation scheme.
“In my view, the government has failed to understand the insurance market and done nothing to improve the viability of the independent broking sector or the availability of advice for consumers.”
Biba complains that, in appointing the FSA to fulfil the IMD, the government “squeezed insurance mediation into an existing regulatory structure not designed for what is a low-risk area in financial services”. Moreover, once appointed by the government, the FSA chose to implement the Financial Services Compensation Scheme in such a way that UK brokers are liable to pay out for the failure of insurers or even banks – a situation that is unique in Europe.
Biba chief executive Eric Galbraith says: “The FSA’s regulation of the general insurance sector is a legacy of the current Labour government. Being shoehorned into a regulatory structure not designed for general insurance intermediaries has been costly and unhelpful for the sector.
“Regulation is a given, but it has to be more proportionate and less expensive. Let’s not look back, but instead let’s learn lessons from the past and get regulation right in the future. The financial crisis has highlighted the strength of the general insurance sector. General insurance intermediation in particular is a low-risk activity, and whatever government is in power needs to reflect that in the regulatory mechanisms they put in place and the value that the broker adds.”
Despite brokers’ vociferous criticisms of the FSA, there is a school of thought which holds that regulation has made the whole industry more professional, and offered a higher degree of protection to consumers. Certainly, the FSA is viewed globally as one of the best regulators.
In recent months, of course, the regulatory focus has been on the financial crisis. The insurance industry is anxious to avoid being lumped in with the banks as regulation is tightened. The ABI, for example, is spearheading a lobbying effort that consistently reminds the government and regulators: “We are not the banks.”
So far, this sentiment seems to have been taken on board, with government ministers openly echoing it. The ABI and Biba have also offered their broad support to the government’s white paper on the regulation of financial services, which calls for a strengthening of the FSA’s role and the creation of a Council for Financial Stability.
Labour’s record on competitiveness for insurance businesses is best judged by its results: since it came to power, numerous firms have redomiciled overseas to more favourable tax regimes. For example, insurer Brit is moving its official headquarters to Amsterdam this year, following its failure to convince the Treasury to back down on plans to tax foreign profits.
In June, chief executive Dane Douetil told Insurance Times: “[The Treasury] has had the necessary reports, views and information. But it has not taken a long-term view; there is a political agenda behind it.”
Other insurers to have redomiciled include Zurich, which has shifted its official UK headquarters to Ireland, and a number of Lloyd’s insurers, including Hiscox, which have headed for the sun in Bermuda.
Last week, the ABI released research which would have made uncomfortable reading in Whitehall. In an ABI survey, 80% of UK insurance executives said that if the government failed to improve competitiveness, there would be a drop in the number of insurance firms based in the UK. Almost two-thirds of senior management were tempted to move abroad because of the current UK personal tax system.
Ministers and insurers have been arguing about flooding since well before the 2007 floods. Insurers say that if the industry is to continue to offer cover to all home owners, the government must spend more on flood defences and stop allowing homes to be built on flood plains.
This came into sharp focus when the summer floods hit in 2007, and last year the Statement of Principles (the gentleman’s agreement that governs the market), was revised. A holding position was reached in which the insurance industry promised that cover would continue to be available to homes at risk of flooding – but only until 2013, and only on condition that the government continues to develop a long-term strategy for flood prevention and tighten planning laws. Crucial detail has been deferred.
Some of this detail came in the form of the government’s draft Flood and Water Management Bill, which was published earlier this year to the widespread approval of the industry. The bill provides a joined-up framework for various authorities to manage floods, and increases the powers and responsibilities of the Environment Agency. It is not perfect, however. Biba, for example, believes that it has failed to address a number of issues that are key to protecting consumers: social housing, resilient repair, guidance and signposting.
Lobbying now focuses on getting the bill passed in this session of parliament, before any change of government. As well as slowing down any legislation, a new – probably Conservative – government would be unlikely to commit to increased spending on flood defences. With both parties promising spending cuts, flood defences could be one of the first areas to suffer – whoever wins the election.
Personal injury reforms
Arguably, it is on personal injury reforms that Labour has given insurers their roughest ride, largely because of its close ties to the trade unions. The government originally promised to reform the Byzantine system in 2007, publishing far-reaching proposals in April of that year, to the widespread approval of the insurance industry. Under those proposals, more claims would have been fast-tracked, new systems would have speeded up the claims process, and there would have been a far smaller role for lawyers in all but the biggest cases.
However, under pressure from trade unions, which benefit from fees paid by lawyers in return for cases, the government watered down the forms significantly. After numerous delays, it finally announced in the summer of 2008 that the reforms would apply only to motor claims under £10,000 – a massive disappointment to the industry. Now the implementation of the reforms has been once again delayed, with the deadline now April 2012.
For a disease that does not have any symptoms, pleural plaques have caused a considerable amount of pain to the insurance industry. Insurers argue that these growths on the lungs, caused by exposure to asbestos but apparently harmless, should not be compensatable. In 2007, the House of Lords agreed.
The Scottish Parliament is now seeking to overturn that ruling, however – and the UK could follow suit. The ABI and four insurers – AXA, Aviva, Allianz and Zurich – are seeking to stop the action in Scotland with a judicial review, now underway, and have said they will do the same in the UK if necessary.
Gordon Brown declared to parliament in April: “Asbestosis is a terrible disease, and all those who suffer from it deserve the best of help from the public authorities. It is right that we look again at this as a result of legal actions that have been taken about the obligations of insurance companies. The justice secretary will make a statement on this when we return after Easter.”
Surprise, surprise: that statement never came, and the industry is still waiting for confirmation of the UK government’s stance. Many suspect that it is reluctant to make a decision that would be sure to play out badly in the popular press.
While Labour has made positive noises on a number of reforms to the motor industry, action has been slower. The government has implemented new laws through the Road Safety Bill and the Serious Organised Crime and Police Bill to give police access to the motor insurance database, to use automatic number plate readers and the power to seize uninsured vehicles.
However, it has taken five years to implement the key recommendation of the Greenaway Report for “continuous insurance enforcement”, which would see authorities sharing data to pick up on uninsured drivers. There are still two more years before it will be implemented. Moreover, the introduction of electronic insurance certificates, which the government has signed up to in principle since 2005, has yet to be agreed. IT
The ABI highlights this month’s key legislative moves
Draft Flood and Water Management Bill
The ABI supports this bill as a key part of our agreement with the government on a long-term approach to tackle flooding. A number of measures we called for have been included in the draft, for example a more co-ordinated approach with clarity over responsibilities and a strategic role for the Environment Agency. It also covers all types of flooding, including surface water flooding.
The floods of summer 2007 cost the industry over £3bn. In order to make insurance available to as many people as possible, it is important that we minimise the risk to property from flooding to a manageable level. The Environment Agency estimates that, just to maintain current levels of protection over the next 25 years, spending on flood defences will have to increase by £20m each year.
It is therefore essential that this bill is implemented as soon as possible. The ABI believes it should also include legally binding targets (similar to the Climate Change Act’s targets for carbon emissions), a public scrutiny process and provision for adequate funding.
The ABI’s concerns relate to the possible requirement in clause 190 for insurers to publish the data they use to calculate premiums. Clause 190 gives too many powers to the minister to make regulations in secondary legislation relating to financial services, and does not provide any certainty for insurers that they will be able to continue to use age as a factor in assessing risk.
We would like any legislation to be based on evidence that there is a significant problem with people being unable to get insurance because of their age and that the legislation would not have a significant detrimental impact on other groups of customers (for example, through increased costs and restricted product choices).
We are working on a ‘signposting’ solution that gives customers details of alternative providers if any insurer is unable to provide them with cover. Legislation is unnecessary.
Publication of data would be anti-competitive, as actuarial expertise is a competitive advantage. Data would have to be produced on an aggregated basis and would be meaningless to most people. The ABI is working to ensure that insurance is exempt from this bill.
In October 2007, the House of Lords unanimously upheld a Court of Appeal ruling that no compensation should be given for pleural plaques. The judgment in Rothwell was based on the new medical consensus that pleural plaques have no effect on health.
The Damages (Asbestos-Related Conditions) (Scotland) Act has been passed in Scotland, overturning the House of Lords ruling. Four ABI members sought a judicial review, which is currently underway. There has been significant pressure on the UK government from backbenchers, campaign groups and trade unions to introduce a similar bill in Westminster. The ABI has been working with member companies to ensure the judgment is not overturned. We expect a decision when parliament returns.
Financial Services and Business Bill
The government’s bill to deal with the financial crisis will be published when parliament returns. The bill comes on the back of the July white paper, Reforming Financial Markets. The main message of the ABI’s response to the white paper is that insurance did not cause this crisis. Any new regulation should not spread across directly from banking to insurance. As long-term providers of capital, ABI members are well placed to be at the forefront of economic recovery.
The EU Solvency II directive provides a comprehensive new framework for insurance supervision and regulation, introducing a more sophisticated, risk-based approach to supervision and capital assessment across the EU. The framework directive was agreed in May 2009 and the ABI continues to support its overall aims and principles.
In the new stage II of the directive, a large number of significant and detailed issues remain to be settled. CEIOPS (the Committee of European Insurance and Occupational Pensions Supervisors), is consulting on its initial advice to the European Commission.
We believe that the European regulators have taken an unnecessarily conservative and unsustainably cautious approach. Some of the proposals go further than those designed for the banks, which is bizarre given that the insurance industry has weathered the worst financial crisis in 80 years.