After some readjustment pain in the insurance industry, there are signs that investors will return to the sector, says Lord Hunt
The pain for insurers just seems to go on and on and comes from all quarters. Fines by the regulator, lower investment returns, retrenchment and the need to rebuild balance sheets. No doubt there is more to come. Keeping investors and employees motivated grows ever more difficult.
The causes are not the work of a moment and neither will be the solutions, but under all this doom and gloom some business fundamentals are beginning to shine through which should be a sustaining source.
If we look at the current difficulties there is light at the end of the tunnel, both from the tunnel mouth and a locomotive headlight.
Corporate fines levied by the regulator have probably run their course. While the amounts of fines have been rising, the "offences" to which they relate are old and have been in the pipeline a long time. I doubt that they will be such a significant feature in the regulatory landscape ahead. They are more likely to be replaced by action against individuals using the senior management responsibility requirements of the FSA handbook.
Study of the FSA on the record comments around a recent case illustrates the point. This may be a source of worry for senior executives, but drags a brand through the mud rather less. The moral here is to get senior management responsibility right in the first place.
Lower investment returns are less obvious to media news desks as a difficulty for insurers, but are actually by far the greatest problem the industry faces.
No OECD economy has adjusted the commercial mindset to low inflation. Japan experienced it first and, allied to that economy's resistance to fiscal stimulus, its economy has struggled to escape recession. Warren Buffet has been warning his investors for some years now to expect returns more of the order of 6% rather than 12%.
Unfortunately, too many business models are predicated on a view of the world that simply no longer applies. However, once combined ratios are re-calibrated to anticipate more likely investment returns and underwriting standards are set commensurately, we may expect more prosperous times again.
It will be crucial, as the insurance cycle continues, that rates will soften only to a level that recognises that investment returns have moved decisively into a lower range.
Retrenchment and the need to rebuild balance sheets is very painful when it happens. It is crucial to be brutal enough to ensure only one dose of pain is needed.
But the signs are that the market understands the fundamentals and that well-judged measures will command market support. Recent informed comment has supported such market initiatives and properly considered rights issues are tending to be over-subscribed.
This tends to promote the view that post-tech-bubble markets are resuming a more realistic view of value and insurance will again be seen as a sector worth investing in.
In the coming months I expect more painful revelations as the year-end approaches but, equally,
I expect the industry to rebuild its strength and image with investors.
This confidence should flow through to customers too and senior managements will be able to feel that they live to fight another day.