The coalition wants £83bn slashed from the state budget by 2014 – a swingeing 40% cut in some departments. Combine the reduced spending with tax rises, and there is little solace to be found for the insurance industry
Get ready for the axe. Around £83bn is to be chopped off the state budget by 2014, with some departments facing cuts of up to 40%.
The economies run £33bn deeper than those planned by Labour and, combined with possible tax rises, have sparked fears that the UK’s faltering economy will stumble and fall. Only last week, Bank of England chief economist Spencer Dale said the UK’s growth would be “incredibly anaemic” for “up to five years”.
Exactly where the axe falls will be decided in the October spending review, although the first stabs of pain have already been felt as the government aims to cut £6bn this year alone.
This month, it was announced that £1bn will be trimmed from the Buildings Schools for the Future (BSF) budget. Meanwhile, transport, environment and defence are all likely targets, especially if health and international development are to be ring-fenced.
It’s a huge blow for the public sector and the thousands of private companies that feed off its contracts.
So what will all this mean for the insurance industry? The grim news is that all these slices to infrastructure will have a significant negative impact. And combined with tax rises, the scars will run deep across both personal and commercial lines.
Brokerbility chairman Ashwin Mistry believes the BSF cut is a good example of what insurers can expect from down-scaled and scrapped projects during the next five years. Insurers Zurich and Chartis, the industry leaders in schools, are likely to lose out.
Zurich Municipal underwriting manager Larry Stokes says the fire threat could grow now that new sprinkler systems will not be installed in schools. He also believes that the government’s proposals to convert office blocks to schools is more hazardous than new-build and refurbishment of existing buildings.
“If the results start to go the other way, and we get more and larger fires, will local authorities pay higher premiums? Perhaps they could pay more excess to keep the premiums down,” he says.
All this is happening at a time when the construction industry is recovering slowly from the recession. And brokers with professional indemnity packages for architects, surveyors and solicitors will also suffer.
Mistry says: “To cut back £1bn funding for BSF means the construction industry yet again gets another slap in the face. But it’s not just construction; it also has a knock-on effect on the associated trades, such as architects, surveyors and banks.”
Flood defence spending could be a key battleground. The ABI struck up a straightforward deal under Labour: until 2013 it would implement a strategy for flood management and insurers would continue to cover at-risk homes. Legislation – the Flood Water and Management Act – was passed to give local authorities more responsibility for flood management.
The coalition reaffirmed its commitment to the deal, but the Department for Environment, Food and Rural Affairs says it is planning “efficiency savings”. The uncertainty has prompted RSA chief executive Adrian Brown to warn the government: renege on the deal and you can’t expect insurers to keep backing at-risk homes.
The ABI says it doesn’t expect any cuts, but would lobby strongly against any plans. Director of general insurance Nick Starling says that the association will make the case for the long-term management strategy agreed by the previous government to be implemented “so that flood insurance remains as widely available and as competitively priced as possible”.
Continuous Insurance Enforcement
Continuous insurance enforcement (CIE) should be a win-win for the insurance industry and the government. At present, there are an estimated two million uninsured vehicles, with a large proportion of them off-road. A change in the law, coming in at the start of next year, will make it illegal for motorists to have any vehicle uninsured. That should bring in a windfall for motor insurers in extra premium, as well as a bonus for the government through increased insurance premium tax bounty.
CIE should be straightforward enough to implement, however. The Motor Insurers’ Bureau, through its Motor Insurance Database (MID) of all insured cars, will work closely with the DVLA’s database to track down uninsured vehicles. But Biba technical and corporate affairs executive Graeme Trudgill fears that the government may not put its full weight behind the programme. “We would be very disappointed if we did not get support after the efforts we have made with the MID,” he says. “Although we believe CIE will come in, its success depends on how much marketing and support they will give to its promotion.”
Like education, transport faces a squeeze on large projects. Question marks remain over Crossrail, the £15.9bn cross-London railway project brokered by Heath Lambert. RMT union leader Bob Crow believes it is “under threat”. However, sources close to the project say that so much is already underway it would cost £1bn just to scrap it – and there almost certainly would be a legal backlash. Plus, the coalition government has reaffirmed its commitment to the project, recognising the boost Crossrail will give to the London economy.
The negative impact of tax rises are also worrying insurers. Already, the rises in insurance premium tax (IPT) and VAT are having an effect on commercial lines business.
Groupama commercial lines director Malcolm Smith says that although the IPT rise is just 1%, it will bounce back on results as rating is inadequate and profits are marginal. “There’s a real need to significantly increase commercial writing; a 1% increase makes this difficult in an already difficult market.”
Risk management cutbacks
Heath Lambert’s Peter Bristow says he’s concerned about government organisations cutting back on their risk management to save money. That could lead to an increase in claims and more expensive premiums.
“Organisations will have to think about how they deliver their services, and it will require some structural change,” says Bristow, the company’s head of public sector. “That will concern insurers that perhaps a target will be risk management budgets.
“We hope the public sector will not be that short-sighted, and realise the amount it spends on risk management is relatively small.”
He believes that the trend for organisations to club together to get cheaper premiums will continue to grow. “Projects up and down the country are looking at alternative ways of buying a product, possibly by working together to reduce some procurement cost.”
Brickbats and bouquets
The tax rises could also lead to a brain drain in favour of countries with lower tax rates, and there are some fears that a squeeze on police budgets could mean more crime and greater insurance payouts. Perhaps the only bright spot for the industry is the likely growth of outsourcing.
Prime minister David Cameron has talked up his faith in the private sector, and there are likely to be opportunities through outsourced contracts. Mistry believes there are some great rewards on offer, especially in the health sector.
He says there are “phenomenal opportunities” in government-tendered contracts. “There’s a business opportunity for brokers … It’s fill your boots basically … it has to come, because government departments are so notoriously bad at administration and are so prone to over-resourcing.”
It is still early days, and no one knows how brutal the government will be in striving to achieve its cuts. Mistry believes they will be played out against a restrained lending environment, despite tough government talk on forcing banks to boost lending.
However, he remains confident that the insurance industry, and especially brokers, can navigate its way through the cuts by taking advantage of the outsourced work and new areas of insurance.“I think financial lines is going to be a massive issue, and directors’ and officers’ will be a big area for growth. And there’ll be a lot of professional indemnity in this litigious society that we live in.
“Brokers are entrepreneurs and survivors. They will have to react to market conditions when they see them. If it’s raining, put on a raincoat and if it isn’t, don’t. It’s as simple as that.” IT