Insurance Post

This will be a challenging year for the insurance industry

The insurance industry is going to have to hit the ground running when it comes to engagement with government, Parliament, Europe and regulators in 2012. The agenda is long and presents some very significant challenges to insurers.

Several of the issues - most notably those around motor and household insurance - take us into some very tricky areas, posing questions about what is insurance for and how should it be priced. The investigation by the Transport Select Committee into motor insurance was prompted by the rising cost of premiums and a desire to understand the reasons for this. That debate has been broadened by the instigation of a full Office of Fair Trading investigation into motor insurance costs.

Running in parallel to that, at least in the minds of many MPs and commentators, will be the increasingly frantic discussions about the future of flood insurance. The need to put in place a scheme to replace the Statement of Principles has thrust this issue firmly back on the political agenda.

You can throw into this already quite volatile mix the aftermath of the payment protection insurance (PPI) scandal, the pressure to create simpler, more affordable life assurance plans and the Law Commission's continued reform of insurance contract law. You may think these are not especially closely related issues but I fear that in the minds of many they will be linked and will prompt them to question what insurance is for?

Industry experts may feel this will be no bad thing as it will create an opportunity for them to set out their stall and clear away some of what they believe are the misconceptions about what should be insured and what people should no longer expect to find included. This may turn out to be a trifle naive: just listen to the ABI's Nick Startling being questionned on BBC TV about insurers' "moral obligation" to offer flood insurance to people in high risk areas to get an understanding of a very common view of the role of insurance.

Rising motor insurance premiums will clearly nag away at policymakers and MPs especially as above inflation increases take their unwelcome toll on tightening household budgets. The only answer is to get a grip of costs and the insurance industry should, if it continues to engage intelligently with this debate, find allies among MPs and the OFT. Insurers feel they need a public policy mandate to tackle some of the more painful and controversial cost pressures such as referral fees, credit hire and vehicle repair bills. All of these are problems the industry has brought upon itself over the last 20 years and which it now feels powerless to tackle itself but by working with Parliament and regulators it may be able to re-establish some control.

Alongside this is the problem of fraud which the industry and its policyholders are both victims of but have yet to create any sense of common interest in tackling. The debates in Parliament may help achieve this illusive unity of purpose and finally get the message home that insurance fraud is not the victimless crime that many people imagine it to be.

It is the flood insurance debate that I think holds the greater political dangers for the industry, however.

Motor insurance costs have obviously grown as an issue that constituents raise with their MPs but the complaints are pretty evenly spread around the country and, crucially, are not connected. Flood insurance is potentially a far more incendiary political issue as the 200,000 households the ABI estimates are most likely to be cut adrift after 2013 if a solution to affordable insurance cover isn't found are geographically concentrated and are already connected through some very well-organised and vociferous action groups. They will be impossible to ignore.

It is hard to see how the insurance industry can make genuine common cause with these groups and the MPs who represent them. It is certainly possible to see them turning up at DEFRA (the Department for Environment, Rural Affairs and Food) to lobby ministers for a government subsidy to ensure that flood insurance remains available and affordable but the moment that isn't forthcoming (hard to see it happening in the current financial climate) the policyholders will turn to the insurers and play the "moral obligation" card.

All the while these debates are going on, those other issues will also be prompting fresh questions about the role of insurance and the ability of the insurance industry to meet the needs of society and UK plc, especially if we really are facing an economically lost decade. It will clearly require maximum engagement with government and policymakers but it will also require more than a little fresh thinking as 2012 unfolds. 
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