The insurance industry is a rare success story amid the economic gloom, says Lord Hunt. As long as it sticks to what it does best ...
This is a time for the industry to take stock, especially as it was so hard to find anyone who was feeling optimistic at the end of last year.
For me personally, 2008 was an unforgettable year. In the worst economic crisis since the 1920s, David Cameron invited me to return to the Conservative front bench in the Lords to shadow Peter Mandelson, who was parachuted in from the European commission to take charge of the Department for Business, Enterprise and Regulatory Reform.
It is a challenge I relish. I particularly enjoy being part of Alan Duncan’s team, which scrutinises and, if necessary, criticises the government’s response to the crisis.
I doubt there will be a general election this year, so I genuinely hope the worst of the recession will be over before there is any prospect of my party being in government again. This is frustrating, but it does give us the chance to forge policies for recovery.
Financial services have been at the eye of this storm and I believe my years of working closely with major insurers, the Chartered Insurance Institute and so many other colleagues from the sector gives me a special insight into the role they can all play in building a sustainable recovery for UK plc. Insurance is an indispensable part of the solution, not part of the problem.
Who would have thought at the beginning of 2008 that AIG would be humbled; that many monolines would become engulfed and that the position of trade credit insurers would deteriorate so rapidly?
In financial services, as in all other sectors, business survival is now the priority; the best way of ensuring this is to go back to the first principles of sound organisation, marketing and customer service. Or, to look at it another way, regard what has happened as a reaffirmation of the value of properly brokered and properly underwritten insurance.
The crucial word is, of course, “properly”.
If this crisis underlines anything in financial services, it must be that it is nonsense to argue that large-scale risk concentration is viable, or that risk-spreading through traditional techniques is too expensive.
It’s no good writing huge lines purely on the basis that some hypothetical internal risk model says it is all right. So the crisis of 2008 should be a wonderful opportunity for the London market this year. It validates the business model here, with an emphasis on highly professional brokers spreading risk, not concentrating it, through a system that has now been brought fully up to date by the proper (that word again) application of IT.
I look forward to a new year in which Lloyd’s and the London market come into even stronger prominence, selling their capacity at prices that reflect its worth to those who are insured, in terms of the security it can provide.
I hope we shall see a return to the traditional values of genuine risk assessment and underwriting. That would certainly help to restore the reputation of our financial services industry, both at home and abroad. We must put our house in order – although we are not alone. Most commentators here and (particularly) in the US have allocated at least some of the blame for what has happened to the regulatory system.
Our commitment to developing professionalism must be supported by smarter and more flexible regulation – not knee-jerk or pettifogging. The move towards principles-based regulation makes good sense and must continue. The last thing we need just now is excessively prescriptive, regulatory micro-management, and I strongly support the five principles of good regulation promulgated by the Better Regulation Executive: that regulation should be proportionate, accountable, consistent, transparent and targeted. I also believe stepping back from hard commission disclosure is the right move in business-to-business markets.
Above all, though, this is a time for all of us to focus on the consumer, putting him or her at the centre of things. If that principle provides the foundation for a renaissance, it should be welcomed by everyone, including regulators and government, all of whom should now be backing our sector enthusiastically as a rare success story amid all the Stygian gloom.
Lord Hunt is a partner and chairman of the financial services division at Beachcroft