Ruth Kelly – 2002 Speech to ABI Biennial Dinner

The speech made by Ruth Kelly, the then Economic Secretary to the Treasury, on 3 May 2002.

The insurance industry is an engine of economic growth. As a channel for investment your companies drive growth across the real economy. As a safety mechanism your companies allow others to build for an uncertain future by pooling the risks associated with that uncertainty.

So it is good to see the sector in such a secure position: the largest in Europe, employing over a third of a million people, and contributing around £8 billion to UK overseas earnings:

In the year 2000 insurance companies long-term business received £136 billion in total worldwide net written premium and paid out £95 billion in benefits.

The general business of the insurance industry is also important – receiving over £34 billion in total worldwide net written premium in 2000.
The insurance industry is one of the UK’s biggest sources of investment. Taken together, in the year 2000, your companies held over £1,100 billion in company shares and other assets, accounting for over 20% of investment in the stock market. That is more than the pension funds and the banks put together.

It is in all of our interests to see an effectively functioning insurance industry, enabling individuals to save sufficiently for their old age, allocating investment efficiently, and providing a structural solution to the problem of risk.

As an economics Ministry the Treasury has a particular interest in each of these areas. These interests define what I see as out sponsorship role for the industry. Our approach is not “the industry is right or wrong”, for its own sake. That is not in anyone’s interest – consumers, the wider economy, and not even the industry. We are interested in the insurance industry – and all financial services – for what they offer the individual and what they contribute to the economy. If the industry performs this function well it too will benefit from the deeper markets and the better returns that will follow.

There is, I believe, a virtuous circle to be drawn. This means that, as sponsor, we will argue your corner – in Whitehall, in Europe, and across other international platforms. It means we will clear away the obstacles that impede progress to an efficiently functioning market. But we are not here to protect special interests. The bottom line is this: our interest is in what you deliver to the economy and to individuals, and that should be your interest too.

As an economics ministry we have to take a view of the industry in the round. We have to protect the interests of consumers and ensure a high level of confidence in the industry. We have to get the regulatory regime right – protecting consumers without inveigling against innovation or choking competition. And we have to understand the importance of insurance in the abstract – why the market exists at all – so that if we need to step into the breach we do so in the right way: insurance against the threat of terrorism is an obvious example.

There is a lot going on at the moment. On the general side there is the prospect of regulation, and issues like terrorism and floods which touch on the basic principles underlying insurance and the relationship with Government; on the life side the ramifications of Equitable and the various reviews:

The Modernising Annuities consultation;

The Sandler review;

The Pickering review

An Inland Revenue review into the tax treatment of occupational pensions;

The Penrose enquiry; and,

The FSA’s review of polarisation.

Annuities are going to play an ever more important role in delivering income in retirement. Yet at the moment many people do not get as good a deal as they might when they convert their pension pot. They don’t shop around, or they buy the wrong type of annuity – yet they are making an absolutely critical choice and one that will affect the rest of their lives. The minority who want more flexibility in the use of large funds has so far dominated the debate. Our consultation on annuities shifts the focus to the real issues: how to make the market work better for the increasing number of people who will retire with more modest pensions.

The aim of Ron Sandler’s review is to identify the competitive forces that drive the long-term retail investment industry – including personal pensions – and examine the incentives created by the structure of the market.

The intention is to ensure that the structure of the UK market, with its products and government and infrastructure, leads to efficient investment decision-making and to optimal outcomes for consumer interests more broadly. The report is due in the summer.

Alan Pickering was commissioned to carry out a comprehensive review of the rules and regulations governing private pensions. He will be reporting to Alistair Darling in June with recommendations for simplifying the structure. The aim is to make sure as much money as possible goes into the pension pot and not on red tape, as well as making it easier for employers to offer good pensions to their workforce.

In addition, the Inland Revenue is investigating ways to simplify the taxation of occupational pensions, to reduce further administrative burdens and make pensions easier to understand.

The Penrose Inquiry is examining the situation that arose at Equitable Life and led it to close to new business. No date has been specified for the report’s delivery. But I am assured that it will be produced as quickly as is consistent with delivering a thorough and authoritative account

The FSA are reviewing their position on the regulation of insurance, aiming to shift to a more risk based approach. And CP 121 reviews options for reform of polarisation in the provision of financial advice – we have a fourteen-year-old system and, in the review, an opportunity to move on.

Sandler, Pickering, Penrose, Tyner, that is a lot of reviews. And I can understand why some complain of overload. But this is an opportunity as well as a chore. We are not bound by the past; we are in a position to create a market for financial services that is ready to meet the challenges of a new century and the needs of consumers who, increasingly, will rely on the private provision offered by your companies.

At the other end of the spectrum we find general insurance products. Here, the issues are very different – simpler products, better understood by consumers, sold mainly on an annual basis. There is still a need for regulation, of course – both prudential regulation of companies and an appropriate level of protection for consumers.

As you know the FSA will be given responsibility for regulating the sale of general insurance products over the next couple of years. The Treasury and the FSA have already begun the consultation process leading up to the regime. This will gather pace during the summer once we have the Insurance Mediation Directive in its final form and can consult formally on what the new regime will look like.

I hope you will all participate in the consultation process. The aim is to enable us to design a regime which takes account of the varied nature of the general insurance market, offering proportionate protection to consumers, whilst helping you to take advantage of the passport into other European countries.

Reforming the operation of annuities, advancing the advice agenda, prudential regulation – all of this assumes the existence of some kind of market. There are more fundamental questions to address. What happens when the market cannot operate? What happens when the mechanism fails?

Under normal circumstances it is the function of government, properly understood, to ensure the markets operate efficiently. When the market disappears there is, on occasion, a demand for more substantive engagement – the light touch is replaced with a heavy hand.

Post September 11th, commercial capacity for terrorism has been withdrawn across significant patches of the market, the insurance industry and insured communities have cried hazard and asked the government to step into the breach. We did this for the aviation industry through the Troika scheme: a measured response to the threat of all aircraft being grounded due to lack of insurance cover. A market failure such as this is a necessary but not a sufficient condition for Government to intervene. We also need to consider the consequences of that market failure, and the longer-term implications for the market itself of a government-backed scheme.

The hurdle for government intervention is set intentionally high. By its very existence a Government-backed scheme will ?crowd-out? competition from the private sector. If the price is the same, most people will opt for the certainty associated with a Govt-backed insurance or reinsurance product rather than the commercial alternative.

The dialogue between Government and the insurance industry on issues like terrorism is ongoing. We need to deepen that dialogue, building on the understanding that government intervention should not be assumed and that cases of market failure will be judged on their own de-merits. We also need to see evidence of the real impact of market changes rather than relying on rhetoric and anecdotes.

Dialogue is the way forward. Across a whole range of issues the ABI has strengthened and deepened the relationship between the Government and the insurance industry. Work on codes of practice has improved the operation of the industry and reduced the requirement for regulatory intervention. Work on insurance with rent schemes has improved the public image of the industry and assisted us in our efforts to end financial exclusion. The Raising Standards scheme promises to provide a quality mark for long-term savings and pension brands – covering key aspects of customer service.

Working together we can ensure a positive outcome for the industry in EU negotiations; we can police the boundary between market failure and government intervention; we can keep the UK regulatory regime under review and up to date; and we can build, for the future, a secure, productive insurance industry in a secure, productive Britain.