Opinion

A lighter touch
Bob Scott says applying regulation based on the life industry is unnecessary

Statutory broker regulation has the potential to place a huge and unnecessary burden on the non-life industry.

I experienced at first hand the tough measures used to regulate distributors of life and pension policies. There is a real danger that a wholly inappropriate level of regulation is applied to the non-life sector. The cost of regulation has to be passed on and it is necessary to strongly challenge any increase in the workload of intermediaries and insurers, which does not have any benefit to the consumer.

There is a huge difference between long-term 25-year, 30-year and 40-year life and pension policies and non-life policies where customers can change supplier, distributor and buying channel year-on-year. Approximately 25% to 30% of motor policyholders change their supplier each year. Something like 15% to 20% of homeowners change their contents policy provider every year. And for some suppliers and distributors there isn't even the security of more than a year's custom. For travel insurance the dominant product is the single-trip policy with a low level of premium.

Another reason why the regulator should use a light touch is there is no evidence of widespread mis-selling and motor insurance in any event is primarily a regulated product.

The General Insurance Standards Council (GISC) was certainly heading in the right direction. The ombudsman plays a particularly effective role in general insurance and it should not be forgotten that the introduction of this concept was a voluntary initiative of the major insurers, Most issues of concern to the consumer in non-life insurance are claims-related. The ombudsman has set the appropriate precedents for most eventualities that have resulted in disputes between insurers and customers, ensuring fairness for the consumer.

I would not like the reader to think that I am in any way supporting poor standards, but best practice for general insurance is continually advancing and the CII's Foundation Insurance Test is being adopted by many organisations as part of GISC accreditation. I hope that the speed at which Financial Services Authority (FSA) regulation is being pursued does not result in a loss of momentum in raising standards, particularly for those organisations that are actively committed to raising standards as part of GISC accreditation.

After all, even with the costly regulation that has been introduced for life and pensions selling, a major voluntary initiative sponsored by the major insurers, the Pensions Protection Investments Accreditation Board (PPIAB) has been strongly supported. The quality mark scheme is all about brands meeting consumer concerns when buying financial products.

The regulator must remember travel, motor and home policies are simple and straightforward compared to life and pension policies. Let's set appropriate regulation and encourage raising of standards rather than a prescriptive system that could add unnecessary cost.

Complicit affairs
How will the Enron scandal affect the industry? We don't know, but may soon find out...

Undoubtedly the Enron scandal will have an effect on the industry, but it is still difficult to see exactly what. Inevitably brokers and risk carriers will find themselves caught up simply because they were involved in doing business with Enron and Andersen.

The key question on this count is complicity. Investigators are looking very hard at LJM2, which is suspected of being a company used to hide debts for Enron. Aon had some dealings with LJM2.

The wider implication of the Enron scandal is that it again exposes the problems of auditors who are also management consultants.

Can chinese walls really ever work? Criticisms were levelled at KPMG over the Independent Insurance collapse. It reaped over £600,000 per year for auditing and nearly a million for management consultancy.

AXA certainly thinks there is a problem and refuses to let its auditors earn more from consultancy than auditing.
It seems management accountants are having doubts themselves. PricewaterhouseCoopers' management consultancy arm is set to be floated and Ernst&Young's consultancy business merged with Cap Gemini. And if that wasn't enough, US regulators are saying that legislation will set rules on the combination of auditing and management consultancy provided by one firm to a company.