Opportunity knocks

We talk too often about challenges at present, too little about opportunities. No doubt that reflects expectations of a flat consumer demand; of people saving, not spending. The consensus is that the recovery will be slow, but nobody really knows. The safest bet is that the next quarter will be the same as the last.

Instead, remember a few facts. The government is raising about £200bn in extra debt per year and there are nearly 60 bond auctions a year. Interest rates can only go up, so new debt will be more expensive and taxes will rise to pay for it.

Gloomy enough? But markets will recover and people will start spending – they always do. The big challenge is to be ready; ready to grow again, with innovation strategies in place and your reputation high with customers.

The constant focus on cost in a recession can damage customer satisfaction. Fraud is increasing and the industry is rightly bearing down on those it suspects. The challenge, however, is not to alienate the honest customer in doing so.

Plus, the search for new customers in a stagnant market makes existing customers wonder what is going on. The word on the street is that it is always better to switch as that creates a challenging market. Why, I am asked, does the industry not put as much effort into loyalty and retention as into switching? I know that many do, but that is not how it often seems out there.

The growth of price comparison sites has also intensified the focus on price. The FSA is asking more and more questions about these sites and, as always, their concern focuses on customer expectations. The internet policy and the policy sold over the phone by the same firm are not always identical. Why should they be if one is cheaper? Because the customer expects them to be.

We have come a long way in improving customer outcomes. But we have further to go and we must make sure that our great innovations – new ways to tackle fraud, new uses of the internet – do not carry the seeds of new problems.

Perhaps here it is worth offering a few words of farewell to the FSA. The Conservatives will dissolve the authority and the Bank of England will take

on prudential regulation. A new Consumer Protection Agency (CPA) will be formed. Its sole focus will be what it says on the tin: consumer protection. We must ensure that it focuses on the real consumer interest, not just on making the consumer ‘safe’, and that it understands that more regulation pushes up prices and leads to fewer people protecting themselves.

The regulatory challenge lies also on capital requirements. Solvency II is a good piece of work. But the proposals for implementing the regulations are bizarre, requiring a huge increase in capital on both the life and general sides.

I have been asked many times by regulators in Europe why insurance should not require more capital. Bankers need it. Why not insurance? Because insurance is not banking. It does not leverage capital. It puts capital behind risk. And over the past year its model has been stress-tested – not in theory, but in practice – and it held up strongly. We must get this message over.

If we fail, the UK and Europe will become less competitive internationally. Any firm based in the EU must apply EU standards when doing business in the US. So EU-based firms would become uncompetitive in the largest market in the world.

Competitiveness also rests on the tax regime. The UK tax system is in danger of driving insurance businesses away. In an ABI survey of chief executives and finance directors, more than two-thirds said that if the UK’s corporate tax regime remained unchanged, the number of insurance companies domiciled here would drop. Likewise on personal taxes. More than two-thirds felt the uncompetitive regime made it more likely that they would look to work abroad.

These are some of the challenges of our current circumstances: economic context; keeping close to consumers and raising customer outcomes; maintaining our competitiveness in a difficult fiscal and regulatory environment.

But there is one respect in which the difficulties faced by the government could give rise to opportunity. All the political parties are looking again at how far the private sector can manage the risks they currently control. The Conservatives have proposed that long-term care should be provided through a new type of insurance. Are there other areas where the private sector risk managers of society – the insurance sector – could develop markets where state provision has traditionally held sway?

We are indeed in challenging times. But in challenging times, those who see most clearly through the mist will be best prepared to take advantage when the upturn comes – as it will.

Stephen Haddrill is director-general of the ABI. This is part of a speech he made to last month’s Insurance Times Leaders Forum