Political Interview: Matthew Hancock: A positive relationship

If the UK electorate consisted solely of company executives, the 7 May general election would result in a landslide victory for the Conservative Party.

Published earlier this month (17 February), the Ipsos Mori Captains of Industry poll of more than 100 executive board-level directors and chairmen found 77% believed a majority Conservative government would be best for their business.

With reservations about the party’s policies largely emanating from people occupying positions outside the boardroom, it is fair to say Matthew Hancock, the Minister of State at the Department for Business, Innovation and Skills, and Conservative MP for West Suffolk, may be excused for sitting somewhat more comfortably in his seat than some of his cabinet colleagues.

In the five years since the last general election, the UK financial services industry has progressed through a period of recession into a landscape where a newly-invigorated regulatory system rules the roost and legislation originating from Brussels continues to frustrate and bewilder in equal measure.

But what of the general insurance industry’s lot during the coalition government’s time at the top?

Truth be told, it has been a mixed bag for the sector, with increasingly onerous regulation, European Union-imposed changes and ‘insufficient’ market inquiries being partially offset by steady reputational progress, the international expansion of the London market and tax cuts.

Commenting on how he views the status quo in terms of the GI industry, Hancock says: “From an insurance perspective, and more widely, we’re strong supporters of the expansion and success of the City [of London].

“We’ve clearly had to take some measures to tackle systemic risk and these have been aimed first and foremost at the big balance-sheet banks – but there are also measures that have affected some insurance companies and I acknowledge that. There have also been some European regulations that we haven’t necessarily been the authors of that insurance companies have to contend with.”

On the more positive developments in recent times, he adds: “On the other side of the ledger, I’d put the reductions in corporation tax [from 28% in 2010 to 20% from April 2015] and the work to ensure London is open for business and attracting both headquarters and activities from offshore.

“So while there have been some changes that have been challenging there have also been some pretty positive changes.”

Politics and business are often derided to varying extents for a perceived London bias. However, work is ongoing among industry leaders to embrace the regions to a greater extent – with one significant example being Lloyd’s of London’s idea of visiting other UK markets on an annual basis to drum up regional business.

Financial heartbeat
Born and educated in Chester, Hancock is equally keen to ensure his party’s view of the business environment is not seen to be prejudiced towards the capital. However, the West Suffolk MP concedes that although it is vital “growth flows throughout the country”, London remains the heartbeat of finance in the UK.

“There’s a massive focus on ensuring every part of the country benefits from the recovery. This is about looking at the wider economy, [which includes] the insurance companies based throughout the country,” he says.

“The evidence is this is working – jobs growth is fastest in the North East at the moment and the North West is the fastest-growing part of the economy in terms of business performance, so this is a broadly balanced recovery. It is vital that growth flows throughout the country.

“Having said that, London has a global reputation for financial services and we should support that.”

While he presents an upbeat summary of the makeup of UK business around the regions, as talk deviates further from London and turns to the influence Europe exerts on the UK insurance industry, Hancock’s enthusiasm quickly diminishes.

“Clearly there’s an impact,” he states. “We want to make the EU regulatory burden less acute. Having a British commissioner as the EU financial services commissioner [Lord Hill] is a step forward.

“Ultimately, we have to resolve our relationship with the EU to make sure we get the best out of the trading relationship, but in a way that allows our respective industries to flourish. London is the biggest insurance market in the EU and it’s our duty to protect that in the national interest.”

Future EU relationship
The UK’s future relationship with the EU remains open for debate, with the suggestion from many business leaders being that a full exit would be a mistake –
but what of Hancock’s personal stance?

“I hope we can stay in a reformed EU but we need some serious reform,” he explains. “There is huge support for the view [among UK businesses] that Europe needs reform and that a reformed Europe is a very attractive prospect.

“Clearly the relationship between the British public and the EU is not a happy one and it’s perfectly reasonable to resolve that and improve the business environment at the same time. We have allies around Europe who are in the same position and it is a priority of this government to tackle the issue.”

The Solvency II directive, which primarily concerns the amount of capital insurance companies must hold to reduce the risk of insolvency, is perhaps the best known piece of EU-imposed insurance regulation.

Reports are mixed as to whether the onerous nature of Solvency II will lead to market exits across Europe and whether or not larger firms are going to be ready by the 1 January 2016 implementation deadline.

While the EU directive has generally been accepted by insurance industry players as a necessary evil, frequent criticisms continue to be expressed within the UK GI industry in relation to the regulatory system closer to home.

Murmurs of discontent have become clearly audible regarding the hands-on nature and occasional incompetence of CEO Martin ‘shoot first, ask questions later’ Wheatley’s Financial Conduct Authority, as well as a lack of insurance expertise at the top of the Prudential Regulation Authority.

Hancock, however, is adamant that, while issues of proportionality need to be taken into consideration, the existing twin-peak regulatory system is fit for purpose and remains superior to the old Financial Services Authority.

He says: “The twin-peak regulatory system is undoubtedly preferable to its predecessor because systemic risks have a different order of magnitude in terms of their impact if they materialise.

“Insurance is much less likely to be a systemically significant risk than the banking sector and we have got to make sure regulation is proportionate and reasonable – not least because managing risk is what insurers do.”

Insurance apprenticeships
An issue that will continue to occupy both the attention of the UK’s major political parties and the wider insurance industry in 2015 is that of apprenticeships.

In March last year Hancock appeared alongside Aon UK CEO Dominic Christian, Chartered Insurance Institute president Ashwin Mistry and Manchester United legend Sir Bobby Charlton – himself a former apprentice – to launch a campaign designed to double the number of apprentices in the insurance industry by 2017.

Speaking at the time, the 36-year-old MP said he believed that boosting the number of insurance apprentices would reduce the desire among insurance companies to base themselves overseas. He is also optimistic the apprenticeship scheme will serve to promote greater diversity in an industry that is attempting to shrug off an unwanted reputation as a profession that is predominantly populated by middle-aged white men in grey suits.

Matthew Hancock on...

The public perception of the insurance industry: People like their insurance company to keep their premiums down and pay out when due. But what we’ve tried to engender is a pro-business and pro-enterprise policy across the board.

Industry perceptions of a UK ‘compensation culture’: There is only so much legislation can do because it is a cultural phenomenon, but we’ve got to be careful that action by government doesn’t have unintended consequences.

The sharing economy: There is no reason why a sophisticated insurance market like London can’t cope with shared use of a car or a house. Technology allows new ways of doing business and the industry has to respond - but ultimately it’s a market opportunity. It’s best when these things don’t require government intervention to happen.

The view that telematics is an important tool in improving young driver safety: Getting insurance as a learner driver is an incredibly expensive experience and some insurance contracts won’t allow it - but new technology can unlock a market that had in some cases dried up by providing better information about the risks insurers are taking. I know one MP who has got a black box in their car - they originally got it for their 17-year-old daughter - but they now drive incredibly safely.

Hancock, who was interviewed by Post just days before Labour leader Ed Miliband attempted to dispel his own unwanted reputation as the head of a party that is ‘anti-business’ by pledging to create an extra 80,000 apprentices a year, remains firmly behind the apprenticeship concept.

He explains: “The expansion of apprenticeships is a really positive way for the sector to broaden its recruitment, but also for the apprenticeship concept as a whole, in that modern exciting service industries like insurance approve of the apprenticeship framework.

“Clearly apprenticeships have a big role to play in broadening the backgrounds of people that go into insurance and I’ve seen it for myself in terms of the apprentices [at the Aon and CII event]. It’s all about broadening opportunity and the insurance industry represents a fantastic career for people that are prepared to work hard.”

Flood Re solution
Another area where politicians and industry leaders have rubbed shoulders in recent years has been around the formulation and planned implementation of the government-backed flood-risk solution Flood Re.

Owned and managed by the insurance industry – but with the government serving as the insurer of last resort – Flood Re is expected to be implemented in July to ensure domestic properties in the UK at the highest risk of flooding can receive affordable cover for the flood element of their household property insurance.

On the scheme’s launch later this year, Hancock says: “This is about making markets work effectively. In this case the government has chosen to take a tail risk in order to open up a wider market – we’ve done the same in terms of social care funding.

“This is collaboration between the government and the industry in terms of who takes the risk, allowing the market to develop and serve customers. Flood Re is a very positive development to tackle uninsurable liabilities and I’m sure it will be a success.”

It has not all been smooth sailing in terms of Flood Re’s proposed inception, however, with an apparent U-turn on the exclusion of council tax band H properties failing to silence opposition from parts of the insurance industry and other stakeholders, as well as SMEs and leasehold properties falling outside of the scheme’s coverage.

When questioned on the potential inclusion of those that currently find themselves cut adrift, Hancock – who has ministerial flooding responsibility for East Anglia and whose own constituency was hit by flooding last winter – responds: “The most important thing is to get this scheme up and running and effective.

“The provision of business insurance does not have as many uninsurable black spots as home insurance and also business risk is different. Nevertheless, I would not rule out going further and supporting small businesses to ensure that market was functioning efficiently.”

It is through co-operation on schemes such as Flood Re and those involving apprenticeships – as well as partnerships on issues including the sharing economy and young driver safety (see box) – that Hancock believes the Conservatives have set themselves apart as a party that appreciates the true value of the UK insurance industry.

He concludes: “The government as a whole has a very positive relationship with the insurance industry. We value the leadership the sector provides. We understand that it is a sector that provides prosperity and jobs. A successful business is one that solves other people’s problems and that is a value that runs deep.”

This article was published in the 26 February edition of Post magazine.