Analysis: Review of the Year 2019

It feels as if 2019 was an uncomfortable year for the general insurance market as it never quite seemed to grasp control of its own destiny. Wherever you look, carefully laid plans were derailed by the unexpected – and often unwanted – intervention of external forces. David Worsfold looks back at the highs and lows of a tumultuous year for the insurance industry

Brexit

No force has been more powerful or potentially more disruptive than Brexit. Plans have been put on hold, domiciles have been moved, European Union citizens working within the insurance sector supported through registration processes, all while policyholders have remained in the dark about crucial issues like health and motor insurance when travelling in Europe. It is easy to fall for the political narrative that we are stuck in an endless groundhog day. A superficial glance at what we wrote in this review last year might appear to confirm that nothing has changed.

“It has certainly been hard to escape from Brexit. The huge uncertainty surrounding the final outcome of the tortuous negotiations meant that most firms are no clearer on how it might affect them – and their clients – as the year closes than they were on New Year’s Day. Hopes have been raised and hopes have been dashed that there might be a deal, or at least an extended transition period, that maintains equivalence. The Chequers proposals reminded the financial services sector that it would have to fight hard and shout loud if it is to sustain any serious traction in the negotiations”.

That final sentence is where the peril now lies for the insurance and financial services sector. It has had no traction with the government. There is no soft landing promised for insurance, no equivalence, no passporting guaranteed. If, and it still remains a big if, the latest proposed deal goes through before the end of January, it has a truncated transition period to the end of 2020. There is little realistic hope of the insurance industry getting anything more out of this than it already has – and that is very, very little.

The industry will be left to rely on individual national regulators offering an extended equivalence. So far, there is little encouragement on that front, despite the generous reciprocal gestures from the UK regulators.

Regulation

Never a year goes by without regulation imposing itself and 2019 has been no exception.

Early in the year the burden of regulation prompted pan-European trade body, Insurance Europe, into a warning about the impact that EU regulation was having on employees, saying the increase of regulatory requirements for firms, had created “a substantial rise in insurance employees’ workloads and stress levels”.

This immediately won support from Steve White, British Insurance Broker’s Association CEO, who said small brokers staffed by one or two people, in particular, were penalised by the weight of regulation: “Since its inception in 2013, the Financial Conduct Authority has issued 145 consultation and discussion papers, calls for evidence and thematic reviews which take insurance brokers’ focus away from helping individual and business customers and we ask for a period of stability allowing time to embed current requirements before introducing new ones.”

It hasn’t been all bad news on the regulatory front. In February, the FCA announced that its market study of wholesale insurance broking had “not found evidence of significant levels of harm that merit the introduction of intrusive remedies”. That was a weight lifted from many industry shoulders.

The industry was not so fortunate with the inquiry into dual pricing. This row started in September 2018 when Citizens’ Advice tabled a super-complaint with the Competition and Markets Authority which responded by acknowledging there was a serious problem.

Attempts by the industry to clean up its act did not impress consumer bodies and regulators and the noose slowly tightened during the year.

First, the government stepped in in May when it said the Competition and Markets Authority could be given the power to impose fines on companies in breach of consumer law without going to court. It also signalled that it would legislate to give the FCA new powers to stop companies taking advantage of loyal customers if their existing powers proved insufficient.

This was followed in early October by the FCA waving a big stick at the industry. It said an estimated six million policyholders in 2018 paid £1.2bn more than if they had paid the average price for their risk. It made it very clear that it was now time for action, announcing a limited six week consultation period “Remedies are inevitable,” said Christopher Woolard, FCA executive director of strategy and competition. “Whether those are imposed through FCA rules is, to some extent up to the industry. They can be remedies that are agreed on a voluntary basis, there’s always scope for that in any market study.” The FCA said it expects new rules – including fines – to be in place by the spring.

Another issue that rumbled on throughout the year was the whiplash reforms arising out of the Civil Liability Act. The enthusiasm for the reforms around the industry was quickly tempered by what many saw as the rush to set up the claims portal. The fear was that with the government so distracted by Brexit, the clarity of rules and protocols needed to make it work and win the confidence of consumers and claimant bodies were lacking as the time for the trials in October approached.

It seems that the unexpected intervention of a General Election has pushed this stage back, making the planned launch in April/May 2020 almost impossible to achieve, although no official confirmation of that was immediately forthcoming.

As we go into 2020, the way the industry treats vulnerable customers will come into the spotlight. The FCA launched a consultation on this during the summer and is currently digesting the feedback.

Also looming large next year will be the outcome of the Solvency II review. This will be an early test of how effectively the Prudential Regulation Authority and the Bank of England can hold the line on maintaining close equivalence with European regulation after Brexit.

 

Claims

Challenges on the claims front came thick and fast, many exerting a sharp upwards pressure on premiums.

The relatively benign claims environment in the aviation market took a severe jolt early in the year when a second Boeing 737 Max 8 crashed, this one an Ethiopian Airlines plane taking off from Addis Ababa. All 157 people on board were killed. It led to the grounding of all the new Boeings, setting off a series of investigations into what went wrong and how the plane received the relevant safety certificates. The entire fleet is still grounded.

The biggest blow to the industry was probably the government’s decision on the discount rate (Ogden rate) for personal injury settlements. Most motor and employers liability insurers felt they were acting cautiously by factoring in a rate of between 0% and 0.5%. In the end, they were hit in July with a  minus 0.25% rate and later a minus 0.75% rate in Scotland. This made eyes water as insurers contemplated the damage it would do to their balance sheets. It is a battle the industry now acknowledges it has lost, although a mechanism has been put in place for more frequent reviews.

Several major issues kept surfacing during the year that have the potential to cause the industry some real image problems as we go into 2020.

The inquiry into historic allegations of child abuse kept reporting issues with insurers being unco-operative over compensation claims. In particular, Ecclesiastical came under fire for its handling of claims involving the Church of England.

The other issue was Grenfell. Although the first part of the public inquiry focused on the response to the fire in which 72 people died, criticisms of insurers kept surfacing, especially why they hadn’t been tougher on the safety of buildings with the type of cladding used on Grenfell. As the inquiry moves on to look at the reasons why the fire happened, this issue is likely to return to the headlines.

Flooding in the UK continued to pose challenges with the ultimately successful battle to save the Whaley Bridge dam in Derbyshire getting nationwide coverage in August. The dam wall at Toddbrook Reservoir was damaged during heavy rain, prompting the evacuation of about 1500 people.

That was followed by severe flooding in south Yorkshire and parts of the Midlands in the middle of November, which initially became more of a problem for the government than the insurance industry but with the spotlight on the region and the response, how insurers – especially Flood Re – performs will be closely watched.

Internationally, the first part of the year was relatively quiet on the claims front but as it progressed some major claims loomed. In October, Typhoon Hagibis hit Japan during the Rugby World Cup, leaving at least 95 people dead, hundreds injured and thousands homeless. Wildfires caused devastation in California and in Australia where they threatened the Sydney suburbs. Growing seismic activity in California during the autumn started to ring alarm bells.

 

Lloyd’s and the London Market

The London Market had a very uneven year, often losing control of the news agenda as it faced a barrage of revelations about appalling sexual harassment. Lloyd’s responded in April by announcing a series to tough measures, including lifetime bans for perpetrators but this did not stop the flow of headlines as women went public about their experiences. As the autumn progressed there were signs that the market was facing up to this problem, especially with the publication by Lloyd’s of a survey that revealed some shocking statistics about the number of women in the market who had direct personal experience of sexual harassment.

A wide-ranging six point plan was launched in October after Lloyd’s CEO John Neal declared he was “appalled” by the findings, adding: “I am determined that we create a working environment at Lloyd’s where everyone feels safe, valued and respected. Cultural change takes time, but we have to accelerate progress and the measures announced today are intended to do just that.”

In terms of results, 2019 started to look better as the pressure on firms to pull out of unprofitable business started to have a significant impact. After reporting a £1bn loss for 2018 early in the year, Lloyd’s was able to smile again in the autumn when it reported profits across the market of £2.3bn for the first half of 2019. This was followed by the company market, through the International Underwriting Association, recording another year of strong growth in 2018 with premiums up by 8.1% to £28.437bn.

Lloyd’s has been pushing innovation very hard. In July it produced a report on parametric insurance – Triggering Innovation: How smart contracts bring insurance to life – which heralded a new generation of insurance products but which attracted little comment or coverage at the time. It is a potential game-changer for the industry. Parametric policies trigger a pre-defined level of claims payment quickly after pre-agreed parameters have been exceeded, such as an earthquake over a certain size. 

As policies are based on definitive information such as previous loss events and independently verified data, insurers have more scope to design products for risks that could otherwise be uninsurable or underinsured. The report describes four practical applications for smart contracts in the cargo, contingency/aviation, agriculture and property catastrophe classes and it will not be long before parametric policies become commonplace.

The biggest news from Lloyd’s was the launch in September of Blueprint One which sets out the first stage of the next generation of ambitious plans to modernise Lloyd’s, including plans for two digital platforms, a risk exchange for non-complex risks that could handle up to 40% of market business, and a platform to support the placement of more complex risks. It will also deliver a digital claims solution, which aims to automatically process simple claims in as short as two days.

Neal has nailed his colours to the mast of delivering this plan: “The support we have enjoyed to date has been essential to delivering Blueprint One and we are seeking the renewed commitment of all market participants to partner with us to achieve our vision to build the most advanced insurance marketplace in the world.”

Confirmation that the modernisation of the market continues to have strong momentum came in the third quarter when it was announced that IUA companies signed up to Placing Platform Limited were accepting an average of 53% of in scope risks and Lloyd’s syndicates accepting 65% of in scope risks. Over 100 brokers were signed up, over double the number a year before.

Brokers

Wherever you look in the broker market in 2019 the wave of consolidation seems to be sweeping over the sector.

The high profile US$5.5bn takeover of JLT by Marsh was completed on 1 April after a round of fundraising in the money markets and EU regulatory approval. Lucy Clarke was unveiled as president of Marsh JLT Specialty but faced a battle to hang on to some key JLT teams.

The speculation that Aon would feel the need to respond to Marsh’s JLT swoop reached fever pitch in March when news of tentative talks with Willis Towers Watson leaked out. No sooner this was out in the open the talks were called off.

One famous broking name disappeared from the high street during the year as Ardonagh closed the last of the Swinton branches following it acquisition of the broking firm from Covea late in 2018. This ended a 50-year plus high street presence for the brand. From its launch by Ken Scowcroft in 1957 and the opening of its first high street branch in Salford in the early 1960s, Swinton grew to be a familiar presence on high streets around the country.

In the mid-market, Aston Lark remained one of the key driving forces behind consolidation, especially after Goldman Sachs become a majority shareholder in September in a £320m deal.

The moving of whole teams between firms has long been a feature of the broking world, especially in the London Market, and most firms, while they might grumble, take it on the chin. When one team left Arthur J Gallagher for rivals Ardonagh patience appeared to run out at the US firm and it launched a court action against Ardonagh for poaching staff from its Alesco subsidiary. This dragged on all year and left plenty of people with red faces, especially Gallagher’s UK boss Simon Matson.

Gallagher had sought £9m from Ardonagh in a legal battle that centred on the departure of four energy insurance brokers who left Alesco for Ardonagh-owned companies in 2017. All bar one of the claims were dismissed by the High Court at the end of October leaving Gallagher with a £3.1m legal bill. The reputational fall out was worse as Ardonagh chairman John Tiner condemned the “abusive and racist language” Matson used about some of the departing staff. These comments were widely reported and forced Matson into a belated apology.

Biba found itself in the news when it invited Boris Johnson to speak at its annual conference in Manchester in May. This choice did not win universal approval from its members but turned out to be a PR success for Biba – as Johnson chose the occasion to announce his intention to contest the Conservative Party leadership election and run for Prime Minister. This made the front pages and the rest, as they say, is history. 

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• Topics
• Allianz
• Aon
• Association of British Insurers (ABI)
• Australia
• Bank of England (BoE)
• Brexit
• British Insurance Brokers' Association (Biba)
• Caribbean
• Covea Insurance
• Crawford & Company
• Discount rate
• DWF
• European Insurance & Occupational Pension Authority (Eiopa)
• European Union (EU)
• Financial Conduct Authority (FCA)
• Flood Re
• Flooding
• Goldman Sachs
• Insurance Premium Tax (IPT)
• International Underwriting Association (IUA)
• Japan
• JLT Group
• Lloyd's of London
• LV
• Marsh
• McLarens
• Prudential Regulation Authority (PRA)
• Solvency II
• Steve White
• Swinton
• United Kingdom (UK)
• United States of America (USA)
• Whiplash
• Willis Towers Watson
• Claims
• People
• Regulation
• Lloyd's/London
• Broker
• Ecclesiastical
• Ardonagh Group
• Civil Liabilities Act
• Aston Lark
• sexual-harassment
• AJ Gallagher