It’s a cold, grey morning when we meet Huw Evans at the Association of British Insurers’ (ABI) London headquarters. Coffee and tea are barely served before Evans has already spelt out the key challenges the ABI is facing – and, as he says, there are quite a few.
This goes with the nature of the work, considering the association’s spread of membership. The ABI represents some 200 insurers and long-term savings providers operating in the UK, of all sorts, sizes and origins. As a result, its members require a wide range of services and expect their specific challenges and areas of focus to be duly considered – at the lowest possible cost and with limited resources. With 90% of the agenda set externally by ministers, regulators, customers and the media, the ABI board has a challenging job in setting priorities and how resources are used. Add to this the constant adaptation to a fast-changing environment and you get the full picture. On top of this, we have just had a year that saw a major government overhaul, wholesale change at the top of the regulator food chain at the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), and obviously the EU membership referendum.
Brexit – the scale of the challenge
On the topic of Brexit, Evans explains: “You’re in the wrong business if you work in a trade body and get frustrated by political change.” Indeed, Brexit may be the ultimate raison d’etre for a UK trade group these days. With the clock ticking towards the official withdrawal expected in 2019, the ABI consulted with members extensively over the summer to articulate the industry’s top five priorities and feed them into the UK government’s negotiation plans.
“Number one is regulation,” says Evans, “with a consensus view that whatever the end nature of the relationship with the EU, UK firms want to have a say over how they are regulated.” This clearly indicates a preference towards the Swiss model and away from Norway’s model, with a full re-appropriation of insurance regulation back into the UK, all of which is further justified by the absence of any existing viable global insurance standards the UK could fall back on (unlike banking).
The second priority is the loss of the passporting facility, which is used extensively by the London Market and long-term savings providers. Passporting denotes the EU-backed ability for UK businesses to trade with the rest of the European Economic Area (EEA) while being regulated by UK authorities only, and thus save substantial costs that would come with setting up local headquarters or showing compliance with each local regulator. Evans explains: “We aim to explain the richness of passporting to ensure that it is not downplayed and deemed to be easily replicated, as it is now clear how damaging it would be if some form of passporting could not be carried forward.” Data is another critical issue, given the upcoming 2018 EU regulation, for which the ABI recommends the UK applies for full equivalence. Lastly, a future migration policy to enable the employment of a highly skilled workforce (including from within the EU) and a stronger emphasis on international regulatory dialogue and agreements complete the list of priorities.
Clearly, it is no small task. One of Evans’ blog posts summarises it well: with Brexit comes “stunned disbelief at the scale of the challenge to unpick this relationship and attempt to replace it with something as beneficial to our customers and wider economy”. This will be fraught with risk. For one, even though London is the undisputed insurance capital of the world and has no obvious continental rival (unlike banking), Evans explains that “the real threat is to lose the cluster effect, which could happen over time, unnoticed and unchallenged”. Another challenge, to the financial services industry more broadly, is not to presume its concerns will dominate every agenda. Evans is clear: “The insurance industry has to win this argument about why it matters, and explain the traumatic impact a hard separation would have on jobs and on the ability to provide services to companies and individuals.”
He continues: “The prime minister’s speech provided greater clarity on her Brexit aims as we head towards triggering of Article 50. We agree there are significant trade opportunities that a more global focus on competitiveness can bring. Her commitment to a phased implementation is welcome but providers still need as much resolved at the beginning of the negotiation process as possible to minimise uncertainty for firms most affected by loss of automatic single market access.”
Banking on public trust
We turn to how the industry is serving its customers. It is hard to believe, but the insurance sector still does not rank higher than banking in public trust, even after the financial crisis disaster and its profound adverse consequences for the wider economy.
Evans puts forward two reasons for this. “First of all, customers interact with banks more regularly, so have the opportunity to be impressed. But probably more relevant is that banks embraced technology like smartphone apps much earlier and are reaping the benefits of being customer-centric.” This is a path for our industry to emulate to enable closer, customer relationships, and, more widely, by providing greater ownership of their data, explaining how underwriting works, showing increased transparency, or rising to the challenge when heavy loss events, such as the 2016 winter floods, hit the country.
The ABI has been playing its part by publishing new guides (such as the Vulnerable Consumer Code in General Insurance), by starting to release claims payment data, and facilitating the dialogue with the Fintech/InsTech sectors. But its flagship contribution will undoubtedly be the Pension Dashboard project.
Evans explains: “Imagine if anyone could access information on all the private and public UK pension plans they ever contributed to from a single online platform.”
This is essentially what the Pensions Dashboard aims to be; a one-stop shop to help people make better long-term decisions. The dashboard spawns from the FCA and UK government sponsored Financial Advice Market Review (FAMR), which means to explore alternatives to fill the gap between costly, fully regulated advice that only the wealthiest customers can afford, and the vast majority of people who can make choices but don’t have access to meaningful and commensurate advice. Evans adds: “The ABI is very supportive of this effort to move away from the total freedom of choice that goes with widespread defined contribution plans and towards more advice and rule of thumb.” This endeavour is under way and has insurers, pension plans and, yes, Fintech, collaborating under an ABI project management umbrella to deliver a prototype in 2017 in time for a test phase. Evans believes: “The real challenge lies in defining the best framework to put around the advice customers will be able to receive with this new information at hand. Current consumer protection standards only allow the provision of advice – however basic – with the accompanying heavy machinery of fine prints and disclaimers.”
A digital world
As we digress on the broader themes of technology and digitalisation, Evans points to Moore’s law of exponentially increasing processing capacity. He believes this is the catalyst to ever-accelerating disruption, and why the industry should think prospectively and head towards where it needs to be in 2025 – not to where others are now. He explains: “The challenge is to embrace what technology can deliver and invest in it to retain the ability to shape our own industry – if we don’t, external disruptors will do it instead. This is not a new situation; for example the GI industry has successfully evolved from sole reliance on fire insurance to the successive eras of the horsecar, metrocar, airplanes, and now autonomous vehicles.”
We ask Evans how he sees disruption most likely to materialise. “It does not consist of reinventing the end-to- end model of providing insurance but rather to focus on the front-end customer relationship,” he says, adding: “The opportunity lies in a large number of relatively disengaged customers currently giving their business to an industry that has been slow to adopt customer-centric technology.”
This is where Fintech has successfully entered the banking industry over the past decade and where InsTech looks to do the same. Evans warns: “The risk is that only the back-end remains with existing insurers after the customer relationship is captured – which is value-dilutive.”
When it comes to embracing and promoting innovation, the ABI hosted roundtables with Fintech and established insurers and long-term savings providers during the 2016 government-sponsored Fintech Week, with the ambition to start a dialogue, develop an understanding of each other and build closer contacts. The recently announced ABI ‘Fintech envoy’ role also aims to cement this effort and further help the industry embrace inevitable disruption. But it is hard to pro-actively embrace the next disruption when so much attention is required to manage the current headwinds facing the industry. In particular, with low interest rates creating a challenge for many insurers, we ask about the ABI’s views on the Bank of England’s role.
“The industry was supportive when quantitative easing (QE) was deployed as a stimulus tool back in 2009. But it has now become a new normal, with no debate of who the winners and losers are.” Indeed, eight years on, the impact of near-zero interest rates has crept into insurers’ and pension funds’ balance sheets, drawing them closer to the losers’ side of the argument, as it has drastically reduced investment incomes and put pressure on premiums. Evans observes that “for the first time in 2016 we heard politicians voicing concern over QE from their constituents. The crux of the problem is that central banks are not directly accountable to anyone. Can we operate in a world where an organisation has no accountability when its decisions have such a fundamental impact on society in general, and our industry in particular?”
As we touch on long-term fundamental impacts, climate change is another priority for Evans, not only affecting claims for general insurers, but also because of the role insurers can play in driving the climate change agenda. Of the December 2015 COP21 conference, he describes how the insurance industry was a noticeable force, “and one of the leading trades pressuring world leaders ahead of the talks, in direct continuation of its efforts over the past decade.” He goes on to explain the importance of ClimateWise in this. “The creation of the ClimateWise Initiative in 2007 – the global network of insurers which engages on behalf of the industry with a wide range of government participants across the world – was a seminal event and a show of foresight.”
ClimateWise has a global advisory group of which Evans is a part and which helps regulators across the world encourage sustainability. “We have a decent track record but cannot afford to rest on our laurels. Insurers face risks on both sides of the balance sheet, as the risks they insure may generate higher losses and the assets they own may decline in value.” The global nature of any viable long-term mitigation of climate change emphasises the influence the industry can exert over others to bring them to co-operate. Evans adds: “The insurance industry only owns about 13% of UK plc shares, down from 25% in the late 1990s, which was a conscious regulatory decision to mitigate investment risk in the wake of the dotcom bubble burst. The result is that we have less collective leverage, however, we have no choice but to continue to keep decision-makers engaged.”
Diversity in the City
On diversity, Evans believes it is vital for the industry’s sustainability that the workforce reflects the diversity of its customers if it wants a better understanding and relationship with them. “On gender specifically – although the industry has three powerful role models in Inga Beale, Evelyn Bourke and Amanda Blanc, who respectively lead Lloyd’s of London, BUPA and AXA – the reality is that we as an industry are not where we should be in terms of broadening out. We have to pull our fingers out. This affects claims departments, finance, actuarial, from the board of directors to the graduate intake.”
The ABI has its own future leaders programme and supports a number of other City initiatives to foster this change. Evans believes this presents an opportunity: “What a fantastic way to change the perception of our industry if we could lead on the diversity front.”
To conclude, we ask Evans if he has any words for the actuarial profession. “Actuaries can help others engage with more analytically rigorous ways of thinking, evidence-based arguments and building cases that appeal to the highly-structured mind. There is too much of an ‘us and them’ divide – maybe due to the appeal of spreadsheets!
I benefited from this gap being closed while working with actuaries earlier in my career, and I would love to see the actuarial profession continue to face outwards.”