Insurance has always been an essential way of meeting the demands of a changing world but its provision in key areas of life is increasingly being undertaken by the state. People expect the state to step in – especially since the pandemic. Our relationship is evolving but where does that leave the balance of risk management between industry and the state?
When it comes to dealing with public risks, government has a clear track record. From terrorism to climate change, it has stepped up to the plate to become the insurer of last resort. Future pandemics are its next opportunity.
There are precedents. In 1993 the UK Government launched the insurance industry’s mutual for insuring terrorism risk in Great Britain in response to the untenable losses and uncertainty caused by bombings in financial centres in London and Manchester during The Troubles. As a result of the attacks, insurance cover was withdrawn for commercial property, meaning that the economy, industry, and the taxpayer were highly vulnerable to future attacks. Pool Re now exists to increase the resilience of the UK economy to acts of terrorism and grow the industry’s understanding of terrorism risk, and consequently its ability to price, manage and package a key aspect of the country’s risk exposure.
In terms of climate change, the government has stepped in where business could not. Government has been working with insurers since 2000 to help make flood risk insurance more affordable and in 2016, the Flood Insurance Statement of Principles was replaced by Flood Re which is working towards risk-reflective pricing to keep householders’ premiums down. Flood Re is due to run until 2039 at which point insurers should be offering policies based on actual risk to property.
There is a pattern here. Nor should we for one minute think conventional insurance is the only option open to bigger government. Furlough and fiscal measures such as the stamp duty holiday and even the holding of interest rates are all measures in the risk mitigation toolbox to protect the economy.
But if the state evolves to meet people’s expectations of protection from seismic risk, where does this leave insurers? The way in which government has naturally become insurer of last resort by underwriting the economy has huge repercussions for the interplay of risk-sharing between the state, the private sector, and the individual. If insurers react to a world of increased risk by retreating behind broader and more numerous exclusions, they will cease to provide relevant protection and value. When you consider how much insurance is forced upon people and business by law, being out of step with government is not a good place to be.
Some leading industry figures have mooted the idea of evolving something like Pool Re into an all-encompassing facility by bringing together existing state-supported pools with new pools to facilitate market participation in risks for which there is currently little or no commercial market. This would help because the rush to avoid paying out to businesses during the pandemic has done little for the public image of insurers.
Pandemics might figure as legitimate exclusions for insurers but if pandemics are a major risk for the UK going forward, then that is where the value of insurance is. If the government becomes the lead insurer, then it may as well take the premiums for other risks while it is at it – and that is not good for anyone.
Will the insurance industry take its opportunity to build back better or retreat from the fray?
Insurance has always been more than a mechanism for spreading risk. It has also acted as a powerful mode of governance for policy makers. It’s a political business whose history is full of examples of older and more recent public-private partnerships to address the threats that face society.
The relationship between insurers and governments has always been close but now insurers are, post the arrival of the pandemic, assessing priorities in a world where the largest risks now include climate and public health challenges. To make matters worse, these challenges are eliciting different responses from national leaderships.
Of course, the issues facing insurers and their relations with trading blocs pre-exist climate change and COVID-19. Protectionism and geo-politics have always figured in the computations of insurance business. Only recently, European insurers voiced concerns that an inability to access markets in places like Argentina, Brazil, and Canada (to name three) would lead to a concentration of risk in certain jurisdictions.
Brexit is no less an obstacle. A report in Reuters in June revealed Britain is reviewing its financial rules for banks, insurers, and markets post-Brexit – largely ending the UK’s access to the 27-nation bloc.
Finally, we must acknowledge that while insurers need to trade in shifting geo-political landscapes, they can no longer assume the political leaders of those regions understand the changing nature of the risks. In the last couple of years, we have seen a diverse response to the pandemic with often tragic outcomes, rioting, and political upheaval in places like Hong Kong, causing the commercial landscapes to alter in some places irrevocably. COVID-19 has shone a light on inequality and stoked years of simmering resentment. You may consider the recent unrest in the United States to be legitimate, or you may not, but the point remains it creates a challenging insurance landscape.
Within this, insurance must find its role and understand it has a communications job to do. So much of our modern lives is supported by insurance and yet most people know very little of its key societal role – how the glue of insurance holds many things we hold dear together and protects many others.
Insurance has been a constant reminder of the malevolent hand of fate that stalks our very existence, but it also has enabled us to have the confidence to undertake ground-breaking missions and to care for one another when things go wrong. This is a story that is very often untold.
The future of insurance and its relationship with society will depend on the decisions we collectively take as a society as we emerge from COVID-19. Inequality, climate change, international conflict, and further public health challenges all present opportunities for insurance to play a leading role. Asset protection is a key part but so is creating the confidence to find solutions to many of these problems.
It is not an easy fix, and many companies will struggle to move convincingly to a model that goes beyond profit, loss, and balance sheets. But, the expectation will be there. Many boardrooms are now having to uncover their moral compass. We can help you find yours.
Martin Wiggins, Chairman