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Anthony Hilton: Insurance needs a rethink but is ducking the big problems

The Square Mile is home to a number of insurance businesses
The Square Mile is home to a number of insurance businesses / Getty Images
19 November 2019

f you tried to create a system which brings out the worst in people you would end up with one that looks like the current insurance industry. So said Dan Ariely, US academic and industry guru. Insurance may well survive because it allows people and firms to spread risk, he says, but insurance companies? He’s not so sure.

It is certainly true that in the 1970s London was the centre of the insurance world, whereas today there are only two general insurance companies in the top 20, RSA and Aviva.

Commercial Union, General Accident and Norwich Union merged to become Aviva; Royal Insurance and Sun Alliance became RSA. A few more have stopped doing general insurance at all. Standard Life is now an asset manager; Legal & General is asset manager and pension provider; Prudential sells savings products in Asia.

In general though, theirs is a poor legacy. Fifty years ago they dominated the world. Today, while London still does a lot of insurance, its companies are largely foreign-owned. Its big reinsurancers all are. In China, meanwhile, there is technology and product which leaves the West standing.

The value of a modern global business today lies much less in physical assets insured against flood, fire and theft.

Today, the worth of a business needing to be insured is more intangible and much harder to value; the knowledge of the workforce; the quality of the supply chain; the uniqueness of the intellectual property; the proportion of IT, the strength of customer relationships.

Company executives say in the old days they used to be able to cover 90% of their risk because it was tangible. Now it is 30% tangible. The 30% still gets covered, but insurers have has difficulty with the rest.

The risks come in threats to the intangibles and new areas like cyberattack, fraud or loss of reputation. Devising policies which meet client needs has required a fundamental rethink. Unfortunately the insurance industry has responded by pushing off-the-shelf solutions for complex risks that do not really reflect the subtlety of what business wants.

It tries to improve the candle, when what is needed is an electric lightbulb.

Even without client pressure the industry needs to respond to a hostile external environment. The past decade has seen unprecedented downward pressure on rates and a collapse in investment income.

On top of that comes additional competition from new capital entering the industry from outside.

Electric and driverless cars are a challenge, and with them the idea of insuring the person rather than their goods so that, for example, a car is only insured when it is in use, not when it is in the garage.

Regulators don’t help. It was banking which caused the 2008 crash but insurance caught the regulatory brunt. As a result it struggles with regulation in its legacy products, but there is little focus on what is new.

With all this going on, Maurice Tulloch, new ceo of Aviva, has an analysts’ meeting tomorrow to outline his strategy. What he will say is up to him but he is likely to talk about growth and the unfair impact of regulation; of saving, particularly in pensions, and where Aviva Investors could make a big impact countering bad outcomes.

Expect talk of digital and the move from loss-making concepts to profitably attracting a lot more customers; and sustainability, where Aviva has a good tale to tell but has been hiding its light under a bushel.

It is all good stuff but will it actually meet or attempt to meet insurance’s bigger problems? The past two chief executives also talked about strategy in similar terms, but Aviva takes a long time to turn round. Shareholders still think it is bureaucratic, lumberingly big and insular.

Tulloch might also have to decide whether general insurance is worth the candle. Andy Haste, when he was at RSA in 2010, proposed a £5 billion merger with the general insurance side of Aviva.

Aviva said no. But now Tulloch has separated general insurance from the savings side, so RSA, now run by Stephen Hester, could again be looking for a deal.

It would not solve any of the real challenges facing the industry but City advisers would make a fortune, and it would stop insurers worrying about the real issues, at least for a time. Rather like it has done for the past 50 years.