High on enthusiasm, low on policy detail, shadow ministers have left plenty of questions unanswered. Insurance Times tries to pin down what a Conservative government would mean for insurers

There’s an ebullience, a sense of suppressed excitement, a slight giddiness about the Tories these days. After 12 long years in the wilderness, they are widely expected to win the next general election, and the momentum surrounding the party feels unstoppable. A lot could happen before June next year, but when David Cameron takes the stage at the party conference in Manchester next Thursday, he’ll be seen by many, for better or worse, as the next prime minister.

From an insurance point of view, the prospect of a Conservative government is a mix of the good, the bad and the uncertain. They have yet to outline detailed policies on most subjects – why spoil that sense of momentum? – particularly on the complex legal issues that are the bread and butter of the insurance world. But, traditionally, the Conservatives have been a better friend to business than Labour, although the gap has narrowed since 1997.

This doesn’t seem to have changed. The Conservatives’ policy website sets out their stall thus: “Our goal is simple: to make Britain the easiest and best place in the world to set up and grow a business.”

The downside is that the Conservatives’ love of tax cutting and low public spending could jeopardise the insurance industry’s hard-fought wins; on flood defences, for example. All parties have recognised that spending cuts will be necessary after the next election, but previous form and current rhetoric indicate the Conservatives would be the most brutal. And that may give pause for thought to insurers and brokers rubbing their hands with glee at the prospect of lower taxes and a bonfire of red tape.

What to expect

What little we know of the Conservatives’ manifesto so far may encourage UK-domiciled insurers to rethink that move to Bermuda. Corporation tax reduced from 28% to 25% would go some way to cutting the insurance industry’s £2.9bn annual bill.

“We think it’s important that the headline rate is competitive to maintain business and attract business to the UK,” says shadow Treasury minister Mark Hoban, who is also the Conservatives’ main spokesman on insurance.

He seems aware of insurers’

other reasons for moving to more business-friendly climes. “The unpredictability and uncertainty of the tax system is also a big issue. We’ve proposed measures to make the tax system more stable. For example, any changes to tax laws will be announced in the pre-Budget report rather than coming out in the Budget. This will give an opportunity to consult with industry and advisers.”

The other way the Conservatives would help UK businesses is by reducing public spending, he continues. “One of our first priorities that will be of benefit to business is to try and bring down national debt. Our concern is that if we allow it to get out of control, it will force interest rates up to the detriment of business. We need a clear plan to reduce national debt.”

Hoban concedes that cutting spending on essentials such as flood defences would be detrimental to the insurance industry. He makes no promises but says: “That’s why we need to look very carefully at where we reduce our spending.”

Another area where the Conservatives have made their intentions clear is, unsurprisingly, regulation. In July, the Conservatives published a policy white paper entitled ‘From crisis to confidence: plan for sound banking’, outlining a set of drastic reforms to the financial services regulatory regime.

“We will abolish the failed tripartite system and give the Bank of England responsibility for maintaining financial stability,”reads the paper. “We will give it responsibility for the prudential regulation of all our banks, building societies and other significant financial institutions, including insurance companies.”

There would also be a new Consumer Protection Agency, taking powers from the existing FSA and the Office of Fair Trading and placing them “in a single powerful body able to stand up for consumers and ensure they are treated fairly”.

This proposal did not provoke the response the Conservatives were hoping for. Widely regarded as politically motivated change for its own sake, it was derided as “pointless”.

Industry concerns

The FSA may be unpopular, but it is at least the devil the insurance sector knows. Immediate concerns include the upheaval the change would create in a sector already shaken to its core, and the bureaucracy involved in complying with a whole new set of rules from two different bodies.

“It gives the impression that they haven’t really thought through the full consequences of abolishing the FSA,” says one insurer.

Neither will recession-hit companies welcome another prospect outlined in the white paper: insurers paying an increased levy to contribute to higher salaries for bankers in top jobs.

The white paper reads: “We will ensure that the Bank has the resources needed to offer salaries that are sufficient to recruit and retain high-quality regulators. This will mean increasing the industry levy, which will continue to cover the cost of financial regulation under the new arrangements.”

Steve White, BIBA’s head of compliance and training, says: “We already pay more in fees than anyone else in Europe.”

The industry’s concerns were mollified slightly when shadow chancellor George Osborne was moved to pen a column in the Financial Times, promising to tread carefully and replacing the word “abolish” with the less axe-happy “dismantle” in relation to the FSA.

However, the central concern of the insurance lobby is not who does the regulating, but that the regime is appropriate for insurance. Insurers and brokers have very different business models and levels of risk to banking, so they should not be subject to a blanket crackdown.

But do the Conservatives understand the differences between banking and insurance?

Osborne assured the industry he would respect its “special needs” in a speech to the ABI’s biennial conference in June. But there’s little sign of that in the white paper. Insurance is barely mentioned outside the phrase “other significant institutions including insurance companies”, tacked onto a declaration of intent on banking regulation.

Hoban does appear to have noted the industry’s concerns. “We feel that because insurance is systemically important, it should be supervised by the Bank of England. In terms of rules, insurers will have to comply with Solvency II and banks with Basel II, so there will be entrenched differences there.”

He says it is important there are people within the Bank of England who understand how insurance companies work and what the risks are. “The insurance sector has done quite well; it’s survived the crisis in good shape. We’re going to set up an implementation group that will talk with people in industry. We recognise their concerns and we know they’re very different. We work quite closely with the ABI and we will be talking to other insurance bodies as well to reassure them.”

Industry bodies say the shadow Treasury team is receptive to their concerns, if sketchy on some of the detail. Biba has a meeting with Hoban on 14 October at which they intend to outline the broker perspective.

“We’d rather have what the rest of the EU has: an insurance regulator,” White says. “But that doesn’t appear to be possible under the proposals. The plan seems fairly well formed but the detail may still be fluid.”

The other concern is over the powers that the new Consumer Protection Agency (CPA) would wield, and how difficult it would be to challenge if set up with the strong mandate the party has promised. The fear is that it will put a ‘mob rule’ in charge that doesn’t understand

or respect the finer points of the market. Insurers worry it could take a short-sighted view of certain policies, endangering the health and competitiveness of the wider insurance industry.

“There might be certain terms and conditions in a policy that might not work to a consumer’s interests, but if they’re not allowed, it could have a detrimental effect on the market. If insurers decide not to operate in the market, that will restrict consumer choice and have an adverse effect,” says one insurer, who fears the CPA could be “the thin end of the wedge”.

While the FSA already requires firms to submit details of complaints, the white paper suggests these will be made public. “We believe that requiring firms to publish more information about the complaints they receive, and how they are dealt with, would provide an incentive for firms to improve their customer complaints handling. It could also help inform consumers. Therefore the CPA will ensure that this material is made public,” says the paper.

But customer comments are not always the best indicator of quality – as users of eBay will know. And if customers are put off policies just by the high number of complaints, it would be to the detriment of both the public and the industry.

Hoban is quick to defend the CPA proposal. “It will be much more of a consumer champion than the FSA,” he says. “We want to work with industry to get this right. Good regulation benefits both concerns.

“On things like payment protection insurance, there was widespread misselling by the banking sector; it’s an area where customers have been let down. We need to get the balance right.”

There’s one more financial issue on which brokers are keen to hear the Conservatives’ views: the Financial Services Compensation Scheme. As the system of cross-subsidy stands, brokers face paying extra to top up the scheme if a bank fails – a system Biba says is unfair, fails to recognise the low risk of brokers going under, and is unique in Europe.

Hoban is not convinced that abandoning cross-subsidy is the answer. “I think we need to be very careful about how you refine it. At the moment, the problem is with the banks. What happens if a huge insurance broker goes down and all the risk has to be borne by that sector? I just think we shouldn’t have a knee-jerk reaction.”

Conservative policy on the key issues for insurers is still up in the air, which gives the industry’s trade bodies and public affairs teams something to get their teeth into. Among the hoards flocking to Manchester Central and the Midland Hotel next week, the insurance lobby will no doubt be very well represented. IT

Personal injury claims: Henry Bellingham, shadow minister of justice since June 2007; MP for North West Norfolk

In a nutshell: Good old-fashioned, hunting-and-shooting Tory, Eton-educated barrister Bellingham lost his long-held seat in 1997 but returned in 2001. Joint secretary of the Lords and Commons Cricket Club, he enjoys golf and country sports. He is almost certain to be deaf to union lobbying on personal injury reform.

Insurers have been sorely disappointed by Labour’s efforts on reforming the process for personal injury claims. They estimate unnecessary legal work costs the sector £1.40 for every £1 paid out in compensation. There was hope when consultation in April 2007 proposed a streamlined system, setting deadlines for both claimant and insurer to settle claims quickly where there was no dispute. But when the final version appeared on 21 July, it applied only to motor claims below £10,000 and the impact of the changes affected only insurers. Labour’s ineffectiveness could at least partly be blamed on its close ties with trade unions, which earn referral fees of up to £600 from solicitors for passing on injuries at work. Employers liability claims were left untouched by the reforms.

So there’s hope that a Conservative government, historically no friend to the unions, might do better. “We believe it should be sped up to bring it in line with [the reformed process for] motor claims,” says a Conservative central office spokesman. “It’s in everyone’s interests for it to be a speedier process; otherwise the money all ends up going to solicitors.”

The other big justice issue for insurers is compensation for people with pleural plaques, symptomless scarring on the lungs caused by exposure to asbestos but not linked to more serious conditions. Insurers do not believe the condition should be compensatable – and the House of Lords agreed in 2007 – but the Scottish Executive has said it will be, at potentially enormous cost to insurers. The ABI with AXA, Aviva, Allianz and Zurich have launched a judicial review and have promised to do the same in England if Westminster follows suit. The Ministry of Justice held a consultation last autumn. Insurers were confident it would back them, but there is no announcement as yet, despite originally being promised for “after Easter”.

We may have to wait a while longer. Labour is unwilling to make an announcement that would play badly in its industrial heartlands in the run-up to an election, and the Tories are trying hard to win those votes too. “We think there is a need for a review of the system as it stands and we’re looking into it,” says the spokesman. “We haven’t fallen either way yet.”

Motor insurance: Robert Goodwill, shadow transport minister since July 2007; MP for Scarborough & Whitby

In a nutshell: Steam engine enthusiast, Yorkshire-born farmer and fiercely Eurosceptic former MEP, 47-year-old Goodwill has engaged with the industry’s concerns on motor insurance, but doesn’t agree on the answers.

Goodwill is responsible for Conservative policy on motor insurance and is well aware of Biba’s concerns in this area. The association has been lobbying the Tories to support the continuing insurance enforcement scheme, which is scheduled to come in in 2011 and would mean authorities sharing information on drivers and fines for those who fail to renew their insurance.

As you’d expect of the party of law and order, Goodwill – and shadow secretary of state for transport Theresa Villiers – are keen to cut the number of uninsured drivers on Britain’s roads. But he has reservations about the proposed scheme. “It seems very unfair that people without anywhere to store their car off the road should have to pay to insure it, while people who do have off-road parking don’t,” he says. “They may have perfectly justifiable reasons for not driving the car – if it’s broken down is an obvious one. Would the insurance industry come forward with a policy that would cover a vehicle for third-party damage when it was parked but not when it was being driven?”

He is non-committal on supporting the scheme. “We’d have to look at the practicality of some of these issues. We’d need to see how the system would work.” Neither does he think fines for uninsured driving are high enough to be a deterrent. “Unfortunately it becomes a bit of a no-brainer for people who would consider breaking the law to not insure their vehicles.”

Then there’s electronic delivery of motor certificates, an issue the government has recognised but done very little about. Biba wants legislation on this as soon as possible, but may be disappointed. “We have it under review,” Goodwill says. “We’re aware of the savings it could give the industry, but there are a lot of people in the UK who don’t have access to the internet who wouldn’t be able to accept an electronic certificate. There are still people who would go to the Post Office to tax their vehicle and like to have a piece of paper to show they’re insured.”

Flood defences: Anne McIntosh, shadow minister for Environment, Food & Rural Affairs since 2007; MP for Vale of York

In a nutshell: A well-educated barrister – she speaks six European languages – McIntosh’s long career as a shadow minister includes departments ranging from foreign affairs to culture, media and sport. She is married to John Harvey, chief operating officer of motor insurer Tradex.

McIntosh has pledged support for insurers on flood defences, but the final decision may rest with the Treasury. After taking a £3bn hit for the flooding in 2007, insurers have been campaigning hard for greater investment in flood defences and water management issues such as surface drainage. The Pitt Review into the floods called for urgent action and was welcomed by insurers in June 2008. The industry also broadly supports the resulting Flood and Water Management Bill, a draft version of which emerged in April 2009 for consultation. The hope is that it will appear in the Queen’s Speech, when parliament returns, and pass in this session – if not, it will rely on an incoming Tory government.

McIntosh is well aware of the vulnerability of large swathes of Britain – her North Yorkshire constituency suffered in 2007 – and has lobbied the government and Environment Agency on her constituents’ behalf. Insurers who’ve met her have found her sympathetic to their case for investment in flood defences.

Conservative policy is to support the bill. A spokesman said: “We have been critical of the government's delay in coming forward with legislation and so are committed to seeing the flooding aspects of the draft bill implemented as soon as possible. If the legislation does not make it through under the current government and we win the next election, then we would take it over.”

But funding for flood defences is another matter. The Conservatives are never keen on lavish public spending and, in the current economic climate, they have good reason to make cuts. On whether they would match Labour spending promises on flood defences – £2.15bn up to 2011 – the spokesman said: “We have not set out detailed spending plans and all Defra programmes are under review. We recognise the importance of flood defence.”

Financial regulation: Mark Hoban, shadow minister for the Treasury since December 2005; MP for Fareham

In a nutshell: This genial accountant is the Tories’ go-to man on the stickier aspects of insurance. He’s good at saying the right things to charm the industry, but his avowed sympathy has yet to emerge in policy.

All roads seem to lead to Hoban within the Conservative party. Other members of the shadow Treasury team, including shadow chief secretary Philip Hammond, direct enquiries to him.

“We haven’t got any policies at the moment that relate directly to insurance,” says shadow business secretary Kenneth Clarke’s office.

In his previous career as a chartered accountant at PricewaterhouseCoopers, Hoban audited broker Bain Hogg, now part of Aon, which he claims has taught him all about the concerns of brokers. Now, however, his education is more likely to come from the concerted efforts of the insurance lobby, which has buttonholed him on a range of regulatory issues.

He seems to be listening: he’s name-checked the ABI in Parliament, spoken out on the reasons for UK insurers relocating abroad, and says the right things to reassure the industry that he doesn’t tar them with the same brush as bankers. But on policy detail, there’s still a lot we don’t know.

The industry’s inside man: Lord Hunt of Wirral, shadow minister for Business, Enterprise and Regulatory Reform since October 2008

In a nutshell: Veteran committee member, campaigner and lawyer, Lord Hunt looms large in the insurance industry, having fought its corner in parliament since being appointed a life peer in 1997.

Lord Hunt is senior partner of law firm Beachcroft and specialises in insurance and financial services. He advises the ABI and has his fingers in many insurance pies. He led the legal teams that established the Pension Advisers' Support System (PASS), the Pensions Protection Investments Accreditation Board (PPIAB) and its Raising Standards Quality Mark, and the Association of Independent Financial Advisers (AIFA), serving as its chairman from 1999 to 2002. He is a fellow of the Institute of Actuaries and an honorary fellow of the International Institute of Risk and Safety Management. In 2004 he became the first independent chairman of the professional standards board of the Chartered Insurance Institute.

In 1979, Hunt became a member of Margaret Thatcher's first administration, as parliamentary private secretary to John Nott, first at trade and then defence. After a spell as a whip, Thatcher appointed him coal minister during the coal strike, then deputy chief whip after the 1987 general election. After serving as minister for local government and inner cities from 1989-90, he was appointed secretary of state for Wales. Re-appointed in that position by John Major, he became secretary of state for employment in 1993 and then chancellor of the Duchy of Lancaster (and minister for public service and science) in 1994. As a member of the House of Lords, he often represents the all-party parliamentary group on insurance and financial services and is a frequent conference speaker on insurance and reinsurance issues.