2010 has brought a crop of challenges, from international instability to unwelcome merger bids and undisciplined underwriting
Writing in the wake of the latest nightmares for world leaders from Wikileaks, as well as the coldest November weather for two decades, I don’t need to be reminded of the dangers of reviewing a year that still has almost a month to run, but here goes.
On the macro level, 2010 gave us an extraordinary election result, which threw the spotlight on both the depth of our economic problems and the extent of debt in the public sector. That we have at last established some clarity and sense of purpose following the fallout from the credit crunch is a good step forward.
This progress is balanced by what I consider to be the coalition’s worst mistake so far – the reform of tuition fees – which is likely to have both a damaging economic impact and reduce social mobility.
But it is on the international front that three of the ugliest threats emerged, each with the potential to cause havoc for years to come. In no particular order, they are the growing threat of rogue countries, particularly North Korea and Iran; the stress fractures appearing in the euro; and the imminent signs of run-away commodity price inflation over which we have no control.
Within the insurance market, too, we have been subjected to the good, the bad and the ugly in 2010. I have been heartened, above all, by the way many of the more progressive broking firms have used the recession as a stimulus to establish themselves on a much sounder business footing through a range of measures, including staff training, networking and a stronger partnership approach to clients and insurers. Brokers are frontline-facing businesses and this has enabled them to help their clients through the recession.
The less attractive side of the coin reveals a market in which rates stubbornly fail to reflect commercial reality and the future of regulation remains beset by rumour and uncertainty. We can do little about the former except to continue to argue against the insanity of rates that will inevitably show up as bottom-line losses. But the question of where the FSA will end up calls for a far more thought-through industry response if we are not to be shackled with a burden for decades to come.
For me, one of the ugliest events of the year was the RSA’s unwelcome bid for Aviva, which raised many issues, including whether mergers between large insurance companies can ever work. This bid typified the tendency of big insurers to take their eye off the ball in the dash for cash.
For years, we have witnessed a steady erosion of the skill set in the industry, particularly in the area of underwriting discipline. Managing general agencies, marching into the vacuum created, have thrived on questionable practices such as dual pricing and buying market share in fashionable areas, regardless of historical data and long-term risk. It could take just one major catastrophe, such as a one-in-50-years weather event, to bring the house of cards tumbling down. Fortunately, one or two insurers are beginning to row the other way and take back the pen in order to safeguard their books of business.
I was also alarmed by two other trends in 2010. The lack of investment in the training of young people in insurance mirrors the government’s attitude to university education and is, in my view, a well aimed shot in the foot.
And the abandonment of flood defences in many areas will turn vast tracts of the country into effective no-go areas for insurers, leading to selective underwriting and the abandoning of the collective principle.
From a closer perspective, at Brokerbility we did not experience the expected levels of insolvency amongst clients in 2010. However, caution is still our watchword and we are bracing ourselves for another challenging year in 2011. IT