Neither the government nor the insurance industry will be rushing to stick the "privatisation" label on the proposals from the Insurance Industry Working Group, chaired by Aviva's Andrew Moss, which were published yesterday but that is what they are. It makes a pitch for a further 5% of state provided benefits to be shifted to the private sector by 2020. This represents about £17bn of government expenditure annually at current prices.The report is pretty vague about how this will be done or which benefits would be best suited to this switch to private sector provision, although it lists unemployment, ill-health, pensions and long term care as the most likely areas. One important point the report makes is that this would be a relatively modest change of emphasis and not a radical departure from the policy pursued by successive governments since the great shift from private sector to public provision by the 1945-51 Labour government under
Clement Atlee. The research underpinning the report shows that under the broad heading of social and welfare benefits approximately 65% is covered by the public sector while the remaining 35% is already private, mainly covering retirement provision, accident, ill health and income protection. So, although it is privatisation we are talking about it is important not to get too excited about it representing any sort of radical departure form the consensus of the last 60 years.
There is a danger that this sensible proposal to review that balance afresh will be dismissed by some as an attempt by the insurance industry to feather its own nest. The report certainly doesn't come across in that way. It sensibly makes the number one priority a restoration (or improvement) in consumer confidence in the industry and trust in the products it offers. Without quite saying so, what it is confronting here is its own dark past at the public/private interface. The pensions mis-selling scandal still hangs heavily over the industry and the more recent high profile problems with payment protection insurance have been a stark reminder of what happens when commission greed comes in front of customer need.
These proposals need to be taken seriously because we are drifting alarmingly towards an era when the state will not be able to afford to pick up the pieces anymore. With the saving ratio collapsing from 12% in 1980 to 2% in 2008, according to the report, there is a serious crisis brewing if some radical solutions are not put in place soon.
There is, of course, alot more to the report than this but it won't grab the headlines. Much of it - about predictability and stability in taxation and regulation - goes over the same ground as the report from the
Financial Services Global Competitiveness Group under Sir Win Bischoff, that was published last month and the two really do need to be read together. The IIWG report does, of course, enter some special pleas on behalf of the insurance industry on regulation, not least to warn of the dangers of "read across" from the banking crisis. It details the reasons why the insurance industry doesn't need tough new regulations, especially with Solvency II just around the corner in 2012. The government clearly understands this as the Chancellor, Alistair Darling, was co-chair of the group and has put his name to the report. The industry will be well advised to make sure the shadow Chancellor, George Osborne, adds the report to his reading list over the summer as his
recent proposals on regulatory reform lump insurers in with the banks.
Elsewhere in the report the industry scores some nice lobbying points on a few of its current concerns such as pleural plaques and the Equality Bill and eloquently sets out the case against retrospective legislation which does so much to undermine its pricing models.
One area the report doesn't adequately address is the need to compete against the banks for potentially scarce capital. It says alot about the dangers of making the UK insurance industry uncompetitive when compared to other markets but not enough about the huge capital grab that the banks will have to launch in the next few years. We all know that high risk banking operations will have to be underpinned by much higher levels of capital than at present - we just don't know how much more capital regulators will insist they hold or what timetables will be put in place. They will, however, be looking for this at just the same time as UK insurers will need fresh capital if the £17bn switch of social benefit provision gets the green light. This needs to be on the agenda.
