Lessons from the lost decade

The UK is experiencing more financial turmoil than at any other time in the past 60 years. This is creating a fundamental shift in the way consumers think about money, financial planning, general insurance and protection. Examining Japan, which experienced a “lost decade” in the 1990s, can help us to assess how this shift may affect the financial services business.

While the reasons for the Japanese “great depression” are complex, many commentators agree that its cause centred on the bubble economy of 1989-90 in which high land and stock market prices collapsed. Banks became crippled by bad debts and stopped lending. Unemployment rose and consumer trust hit the floor.

The collapse of housing and equities caused panic: spending stopped, the economy stagnated, and while people saved, they avoided the stock market.

The Japanese government simply didn’t act quickly enough. The topple of one bank led to a domino effect: bank after bank and, eventually, insurance companies and other financial institutions went bust.

Customers became risk averse, especially over long-term savings, and much more careful about their day-to-day expenditure.

Even by 2003 it was still hard to persuade consumers or companies to borrow money as, with a relatively low state pension, consumers were anxious to save for their retirement and to fund healthcare needs.

There was a rush to risk averse savings: the equivalent of National Savings & Investments or Post Office-type investments or, far worse, the mattress. In 2006 cash deposits represented 55% of total household savings; twice that of the UK.

So, how has the Japanese experience informed action in the UK?

Relatively quick government intervention means that we are, thankfully, not in exactly the same situation. The UK government took immediate action to help to support the banks to weather the crisis by taking stakes in some and helping them to clean the balance sheet.

Other stimulus measures such as quantitative easing, which were used late in the day in Japan, were employed more quickly here.

Although it is too early to assess the results of this policy, the speed with which they were introduced should help. However, economic commentators agree that the beneficial effects of stimulus measures will only truly be felt if the banking system is properly “cleaned up”, which is still an ongoing process.

What else can we learn from Japan?

While the severity of what happened there will probably not happen here, mainly because of the measures taken quickly by the UK government, there are some similarities in terms of consumer reaction.

As in Japan, UK consumers are showing that they would rather protect their money than invest it.

General insurance products, such as home, motor, travel and, to some extent, business insurances, are less discretionary than life, protection or savings products. So price is likely to play an even more important role in this market as consumers look to get a “better deal”.

And both consumers and businesses are likely to make more claims, with smaller incidences – which probably would not have previously been reported – being notified.

Incidences of fraud and claims relating to crime are rising. In the last UK recession, burglary numbers doubled.

Against this backdrop, consumers are looking for trusted insurance brands that are financially stable. The crisis means that they have lost trust in the financial strength of insurers. They want a low price but they don’t want to purchase from brands they don’t recognise.

In this environment, strong consumer brands are paramount. They must ensure more than ever that they give consumers a consistent message and, most importantly, that they never over-promise. That is when any remaining trust is lost.

Consumers are also craving simplicity and clarity. Many of them lay the blame for the recession on the banks in particular, and their inability to manage the complexity of their investments and strategy.

This means that in our general insurance business, as elsewhere, transparency and clear communication of product details and any associated risk are vital to gain their trust. This is a top priority for AXA.

We are also keenly aware of the need for insurers to play their part in supporting and educating people better about taking financial decisions.

The role of financial advisers is set to change with the Retail Distribution Review, and moves to fee-based rather than commission-based advice will require them to offer more perceived value to customers.

We also believe that the workplace is an ideal setting for employers to provide financial information and guidance to employees, and that this will become more important over time.

The past performance of Japan may be a guide to our future. We should continue to learn the lessons of its misfortune in the 1990s.