If the challenges and threats facing the insurance industry are connected, so too are the solutions, according to a new report from DAC Beachcroft.
The report, The Interconnectivity of Solutions, highlights the interconnectivity of risks and the major critical certainties and uncertainties. “The pandemic has further highlighted how they cannot be ignored or siloed,” the report notes, pointing to the links between the pandemic, lockdown, social unrest, financial uncertainty, cyber risks and climate change.
“If the challenges and threats to insurers are connected, so must be the solutions. For an industry that is often identified by its own leading figures as being siloed, this will require radical fresh thinking. The search for solutions will not just be a quest for greater connectivity – perhaps seen as a rather academic exercise by some – but a battle to stay relevant in the face of systemic risks that look to be beyond the scope of traditional insurance solutions,” the report states.
It goes on to say: “All governments have plunged their economies deep into debt in order to mitigate the economic hardships created by the pandemic; but in so doing, they have exposed the gaps between private sector insurance-led solutions and public provision. No-one is suggesting that insurers could have responded to protect individuals and livelihoods in the way governments have, but the pandemic has cast government in the role of insurer of first resort in the eyes of many.”
The insurance industry needs to be at the heart of the debate about how sophisticated economies facing major risks and new disruptive threats respond, says former Cabinet minister Lord Hunt of Wirral, a partner at DAC Beachcroft and chairman of its financial services division.
“It very quickly became clear that it was impossible to insure against the full impact of the pandemic and that remains a major challenge. The scale of government intervention far exceeds the scope of what the insurance industry could do and it is still being asked to do more. There are still serious gaps in many areas. If there is a positive partnership between the public sector and the insurance industry then we can find ways of bridging those gaps, as we have done before with terrorism and flooding,” he said.
The report looks at new risks such as climate change and cyber, suggesting that a new approach is required. Lord Hunt believes that the solutions lie in creating a trialogue between government, regulator and industry. “We must be clear on the allocation of roles as we seek solutions, especially in helping reduce the government’s risk exposure. There is a lot to be said for co-ordinating this through one body and the work that Julian Enoizi is doing with Pool Re is showing the way,” he says.
The report states: “Wherever you look the insurance industry faces major threats to its stability and its place in modern economies. This is far from an existential threat, however. The solutions to those complex, inter-connected issues still lie in the hands of the industry and its leaders. The answers lie in building strong public-private partnerships, bridging protection gaps and lending the industry’s skills to building a more resilient world.”
The report also looks at the lasting implications of Brexit and in particular the issue of equivalence between the UK and EU regulatory regimes, and the impact on the UK’s financial services sector. “This was always the fall-back position once it was clear that there was no hope of maintaining passporting and full access to the single market. It is turning out to be something of an illusion,” the report states.
But it adds that while some sectors of the UK’s financial services industry might still be fretting over equivalence, the UK insurance market has moved on. Mathew Rutter, insurance advisory partner at DAC Beachcroft in London, says: “Equivalence is something of a red herring as UK-based firms have largely made their arrangements in the EU on the assumption that there would be no passporting and no equivalence. Even if the scope of the existing equivalence regime were to be expanded, the uncertainty created by equivalence being under constant review was too much of a risk, especially on claims. The other feature of equivalence is that you have to stay equivalent which means that you are then a rule-taker.”
In the report, Carol Hall, head of European and international affairs at the ABI, says: “We have always said that we do not want to be a rule-taker and that we believe UK regulators should be able to act in a way that is appropriate for the UK. It still feels early days but Andrew Bailey [Governor of the Bank of England], John Glen [City Minister] and others are using the right terminology so it does feel that we have been heard on that front. We know that we have to keep close to the EU and have to adjust to looking at things from a third country perspective.”
Joanne Finn, partner and competition law specialist in DAC Beachcroft’s Dublin office, says that no-one should expect any major moves on equivalence from the EU side. “The pressure to get something agreed has gone. Where is the economic incentive for the EU regulators to give equivalence? They have a regime that the EU27 are signed up to, based on 30 years of hard-won compromise. Changing the course of that cruise liner to follow any new course the UK might want to follow is not a priority.”
In the report, Ms Hall stresses that Europe should still expect the UK to set high standards: “When it comes to conduct regulation, the UK has always been seen as setting the standards and going above the minimum harmonisation requirements.” And Mr Rutter said he does not expect drastic changes: “I suspect it will be incremental rather than a big bang. It will be more about fine-tuning. It is not as if the UK has been a reluctant regulator in the past.”