What price risk?

Talk to Association of British Insurers acting director-general Maggie Craig about what takes up most of her time, and one word looms large – Europe. Solvency II is the big one, but other challenges lie further down the line, most notably around gender underwriting and what the new European Systemic Risk Board will mean for the insurance industry.

For Craig, the gender underwriting issue is like a weed that keeps coming back, having surfaced previously in the form of the Barber v GRE case and the 2003 attempt by EU social affairs commissioner Anna Diamantopolou to outlaw the practice.

This time the chances of Europe banning annuities, car insurance and other forms of insurance underwritten on basis of gender are considerably higher. Juliane Kokott, advocate general at the European Court of Justice has published an opinion stating that gender should be excluded from underwriting. Worryingly for ABI members, four out of five published opinions end up becoming EU law.

“This issue of gender-based factors, whether it is for annuity rates or whatever other form of insurance is a serious charge. We have been through all of this before. And Barber was a man, let’s not forget. We are concerned about the advocate general’s opinion and we are hoping that there will be some reason seen,” says Craig.

“What is insurance about? It’s about pricing risk, so you bring factors that relate to risk. If I have a twin brother and I am going to live longer than him because I am a woman, that is a fact,” she says.

“Look at postcode annuities. You could argue they are racist against Scots on the basis of their shorter life expectancy because they eat deep-fried Mars bars,” adds the Glaswegian Craig.

“Obviously we are not particularly happy with the advocate general’s opinion. But I do understand that this particular director general has had opinions overturned before,” she says.

Kokott is clearly no pushover, however, being credited with helping to bring Italian president Silvio Berlusconi before the EU for changing accountancy rules in his country to suit his needs. The ABI has less than six months to get its message across, with a final determination in spring 2011.

So how soon is it before this clear and present danger, or new liberal approach, depending on your perspective, hits UK pensions? “That would depend on the way the judgment is framed. Kokott has mentioned a three-year transition period, but it would depend very much on what the Court said in terms of how it is to be done and what transition periods would be in place,” says Craig.

Would that lead to insurers having to revisit their back books and increase payments?

“We do not know the answer, but if I have sold an annuity on the basis that I’m going to pay you £10,000 pounds a year for life and I have done on the basis of rates that are based on gender and I have reserved appropriate capital as an insurance company, if someone comes along and tells me something different that does not seem fair. It is more likely to have an impact on how insurers have to price through the new business, but we are theorising ahead of our data at the present,” she says.

Gender underwriting is such a big issue in the UK because of our considerably greater reliance on private pensions than other EU countries. Craig is pragmatic about the fact that cultural and tax differences mean there will never really be a single market in financial services across Europe, yet all the countries involved have to interact in a way that pretends there might be one at some time in the future.

“Markets across Europe are very different. It is partly to do with the fact that the UK has a more highly developed private sector pensions system than the rest of Europe. If you look at the language Europe uses to describe pensions, they talk about pillar one, pillar two, and pillar three – state, employer and personal. That does not fit the UK landscape at all. Is Nest pillar one because the state invented it? Is it pillar two to because your employer pays into it? Is it pillar three because you own it? So I think we have got different position,” she says.

“The UK market is much more into advice, more relationship-based. On the continent it’s much more transactional and bancassurer-based. So anyone who tries to bring together judgments and regulations across markets that are so very very different has a big task on their hands.”

So is it a task worth bothering with?

“We do not have much option. It is about being pragmatic with what you can do. Worrying about a single market does not keep me up at night because I think there is no consumer appetite for a single market. We have enough trouble getting people to buy UK pensions without worrying about whether they want to buy one from Holland or France or Germany,” she says. “What I do worry about is making sure that decisions and regulations that come out of Europe can be applied appropriately to the UK market and I also am concerned that we do not get into a situation where our domestic regulator gold plates what is coming out of Europe.

In fact ask Craig what have the Europeans ever done for us, in terms of actually improving the UK’s financial services market and she is hard pressed to think of anything positive at all, latching onto the EU’s work on Packaged Retail Investment Products (Prips) as a plus, after a lengthy pause.

Much more positive for the ABI are recent domestic events, most notably the new approach to taxation of higher earners agreed with the Treasury and the fresh hope of a simplified pension system.

“Look at postcode annuities. You could argue they are racist against Scots on the basis of their shorter life expectancy because they eat deep-fried Mars bars”

So does Craig think the £50,000 annual allowance should be considered a victory or a defeat?

“We were very pleased about that. We worked very hard on it. We would have preferred them not to reduce it at all, but compared to what we were looking at before, it is like night and day,” she says.

And does the ABI have any assurances that the £50,000 level is cut next year? “No, but I would be surprised if having set a limit at £50,000 they removed it. The comments we made were the reverse. We understand that the government can’t index the annual allowance right now, but you should not forget that it should go back to being indexed in future,” she says. The government has committed to looking at indexation again in 2015.

How does the ABI justify maintaining £7bn worth of relief for higher rate taxpayers at a time when the rest of the country is making huge sacrifices?

“The principle is you should get extra relief at your highest marginal rate, and that principle is right. People might bandy around figures that 25 per cent of tax relief goes to the top 2 per cent, but I think that is the wrong thing to be talking about. It may be that 25 per cent of the tax relief goes to these people, but what is the tax take from these people? The issue is not that they are in the top 2 percent of the population, it is surely what tax they are actually paying. And we do have a lifetime limit, so it is not as if higher rate tax relief is unlimited,” she says.

So does she think that argument has now been put to bed?
“I never get complacent, particularly about the Treasury. Who knows what will happen in the future?
Upbeat as she is about the effects a flat-rate pension above the means-test would have on savings culture, and therefore on inflows into ABI member companies’ coffers should such a policy actually be introduced, Craig is not counting her chickens yet.

“If we got to a situation where means testing was no longer an issue then everybody’s life would obviously be so much easier. People would know where they stood, the savings industry would know where it stood, it would just take so much clutter out of the industry. But having spent all my life in this industry I know perfectly well that with pensions the devil is in the detail so until I actually see what is actually going to happen I am not raising any hopes,” she says.

She also sees potential for the health and risk communities to push for a greater role, backed by financial incentives, in taking over responsibilities currently in the hands of the state, as austerity measures take hold over the next decade.

“One of the examples of this is rehabilitation, which is one if the things the industry is good at. If an individual gets back to work quicker it benefits the individual, the employer and the government. The difficulty comes in trying to define the difference between something that is genuinely rehabilitation as opposed to general PMI.”

Back on the European theme, and the big issue of Solvency II is looming, due for implementation at the end of 2012 – with repercussions for insurers of all types, and not just those in the life and pensions sector. So how is the EU planning to treat both new annuity business and back books?

“It will be applied to both, but we are pressing for a transition period for the back book. You can’t bring in something like Solvency II and make it work immediately, particularly when things like annuities were sold on the basis of the capital required to back them at the time. We are starting to win that argument,” she says, adding that we should get more clarity at the end of the year.

Craig sees a fundamental problem with the process that needs to be checked. “Do you really want to protect people to the point where they cannot afford to buy products or to the point where the product is no longer commercially viable? If you did that you’d still have people walking in front of cars with red flags.”

So what of the future? For Craig, Europe’s influence will increase.

“A lot of the agenda will be driven from Europe. It will be interesting to see what powers the new European supervisory authorities have. There will be 27 seats on the European Systemic Risk Board, one of which will be given to insurance. It is importance that we get regulators who understand insurance because it is a completely different business model to banking,” she says.

Craig has held the ’acting’ director-general role twice now, following the resignations of Stephen Haddrill and more recently Kerrie Kelly, who stepped down for personal reasons in July. Living in a remote converted school in the countryside outside Glasgow, the role means she is away from home a lot. So does she want the job on a permanent basis? “I’m thinking about it.”