Cicero Policy Briefer

Issue 16, September 2007

What are the current key issues facing the insurance industry?

By Archie Kane, Chairman of the Association of British Insurers

There is no question that we face some significant challenges in the months and years ahead and I would highlight five key areas of importance.

Climate Change

The first of these challenges was emphasised recently during the severe flooding in many parts of the country. This served to underline concerns that the ABI has stated about the increasing risk of floods in the face of climate change. We are striving to ensure claims are being paid to our customers but with the overall cost to insurers there is little place for complacency.

In the longer term, the ABI wishes to work closely with Government to ensure that there is an appropriate focus on flood defences and that future house building is sensitive to the risk of flooding. During my chairmanship of the ABI, I expect there to be even greater emphasis on climate change as the debate over how we should respond intensifies.

Retail Distribution

A second key theme is distribution. The FSA consultation on the Retail Distribution Review (RDR) will have lasting impact on the way retail investments are advised upon and sold. The review must create an operating model that works for consumers, distributors and manufacturers while as an industry we cannot back away from the issues on the table. It is essential that the RDR produces an effective and efficient market for the industry while focusing on a target market that is not currently being serviced. Similarly, the ABI must reflect that its members are (with few exceptions) commercial organisations, with a fiduciary obligation to shareholders to make a profit. It’s important that our members can continue to produce, price and deliver our products in a way that works for consumers and the industry. There is little doubt that we are at the very early stages of a long-term debate and the ABI will consult widely across the trade bodies and the industry.

Pension Reform

A third key theme is pension reform. This is high on the list of key priorities for a number of our members and indeed my company has been very active on this issue over the past three years. We have engaged with Government, opposition and wider stakeholders on all aspects of pension reform. While we are quite a long way down the line—the future shape of state reform has been defined by the Pensions Act 2007—there are still some important details to be worked out on how the proposed personal accounts might interact with private provision.

First and foremost, we need to ensure that personal accounts target the right market, extending provision to those on lower to middle incomes, while not undermining existing provision. Ultimately, personal accounts should not end up being a pensions system which operates on a Government subsidy.

With a new Prime Minister and the recent Cabinet changes, there has also been a change in the key personnel. We now have a new Secretary of State for Work and Pensions, a new Minister for Pensions Reform, and a newly-appointed Chairman of the Personal Accounts Delivery Authority, Paul Myners. I look forward to working with Stephen Haddrill and his team, to build upon the effective lobbying the ABI has already completed.

Solvency II

A major longer-term challenge for the industry is the Solvency II Directive which was introduced in July. This will significantly alter the prudential requirements for Europe’s insurance companies to better reflect current developments, risk management and modern finance techniques. We are broadly pleased with the Directive as it streamlines the supervisory regime for multinational groups and removes nationally-based requirements for capital which often inhibit the development of a single market approach by companies. This means that in the future there will be a wider choice of providers and products, leading to greater competition. That’s good for Europe’s consumers. At the ABI we’re looking to lead the debate on this important issue throughout the next couple of years as the Directive is finalised and implemented.

Customer Confidence / Trust

Finally, we must continue to work diligently to build trust in our industry. This is a key objective for me, and I want to ensure that we’re trusted by consumers to reduce their unprotected exposure to risk and to help them prepare for the future. Fundamentally, insurance and pensions have the potential to help all sections in our society. But we also know that too many people aren’t saving and are not utilising what the industry can offer.

We have already begun work to assess how well we are serving our existing customers. Recently the ABI introduced a customer impact scheme survey which measures how well we serve consumers and is actively participating in the Government review conducted by Otto Thoresen, Chief Executive of AEGON, on the provision of financial advice. While we await the outcome of the review, we can all see the benefit of better preparing our new and existing customers to deal with their financial affairs.

In conclusion, there can be little doubt that the opportunities facing our industry are substantial. This is a full agenda and I am delighted to be taking up this new role and working with our colleagues across the insurance industry.

Archie Kane was appointed as Chairman of the ABI in July and is Group Executive Director for Insurance and Investments, Lloyds TSB Group and Chief Executive, Scottish Widows.