Peter Jones: Getting the right policy for insurance sector

Published on Thursday 11 June 2009 21:38

SCOTLAND'S insurance firms, quite unlike the banks, have escaped the worst of the effects of the financial crisis.

So much so, indeed, that Lord Adair Turner, chairman of the Financial Services Authority (FSA), was able to begin his speech to this week's annual conference of the Association of British Insurers (ABI) with a rare joke.

How nice it was, he said, to talk to a sector of the financial industry that has not been responsible for destroying any chance of weekend relaxation.

But that does not mean the insurers and Turner do not have a lot of hard work to make sure the industry stays fit.

With big employers such as Standard Life, Scottish Widows and Aegon located north of the Border, Scotland's part in this industry looms large in the UK.

So it is also good to know that Archie Kane, apart from having a big job to do sorting out the Scottish end of the Lloyds-HBOS merger, also has a key position as chairman of the ABI.

And it is also cheering that both his and Turner's speeches showed much agreement on what needs to be done.

But there are also disagreements on the crucial question of whether regulatory action – while it might be necessary to meet heightened concerns among the public and others about financial stability – might stifle the insurance companies' ability to be nimble enough to meet the challenges of a very much altered market place.

This is not just an important question for those who work in the industry. It is also important for all of us as consumers of the industry's products, especially pensions and savings plans.

The financial crisis, for example, has made those of us who depend on private pension provision to look after our money needs in retirement terribly aware of the vulnerability of that provision.

More generally, it has caused an abrupt shift amongst nearly all consumers. We are all spending less, and using much less debt to finance purchases, while also increasing the amount we save.

The UK savings ratio – the amount of our disposable household income that we put into savings – has shot up from -1 per cent (ie, we were reducing our savings) to nearly 5 per cent.

But, as Turner noted, nearly all of this shift has resulted in actions to reduce immediate fears such as cutting debt, increasing money on deposit at the bank, and even some dipping into long-term savings to deal with immediate financial concerns such as credit card bills.

So, the life assurers and the pension providers face an uphill battle to turn public thoughts to the long term.

If the economy really is turning up, this may become easier. But, as both Turner and Kane said, insurers as well as the banks have to do a lot to rebuild public trust in the financial services industry.

That also involves the FSA and its ability to win confidence as a reliable overseer. It will mean more regulation.

Turner spelled it out clearly. "There can be no return to light-touch regulation and supervision, to supervision on the cheap. That era is over," he said.

Kane accepted that view, up to the point of arguing that there should be no regulatory read-across from banking to insurance and that the policy-makers should "understand the competitive pressures we face and that the UK has transparent and predictable regulatory and tax systems that bring confidence to the market".

There appears to be no disagreement between the FSA and the ABI that there has to be better assessment and management of systemic risks, such as housing price bubbles, so that companies, regulators and politicians have a clearer understanding of the dangers ahead and the actions needed to avoid them.

There also seems to be no disagreement on the principle, if not the detail, that there should be some way of co-ordinating regulation internationally, so that high standards can be maintained without one country seeking to give its insurance industry a competitive advantage by opening regulatory loopholes.

But the difficult area, as Kane acknowledged, is going to be the relationship between regulator and those they regulate. The public now expect the FSA to behave like police officers, licensed to be brutal in their dealings with financial firms. That, however, may result in managers becoming frozen with worry that any of their judgments may eventually bring baseball bats bouncing off their heads.

It is a tough one to get right, but if it is got right, it can work well.

Remember one of the unsung success stories of the FSA? A few years back, it imposed new capital requirements on the insurance industry. That caused much grief in Edinburgh after Standard Life revealed it had to demutualise in order to meet the stiffer tests. But with the benefit of hindsight, without those tests, Standard Life might have been rushed into the emergency ward along with RBS and HBOS.

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