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Trevor Matthews speech to ABI conference Conduct regulation: building on strong foundations Tuesday 18 September 2012
A noble profession I’m tremendously proud to work for an industry that offers prosperity and peace of mind. I believe that insurance is a noble profession. We help millions of people deal with tough times and plan for better financial futures every day. It’s our job - and our privilege - to support people when they have lost a loved one, their home, or their health, and to help them prepare for the future. Almost every adult and business in the UK relies on the insurance industry in some way. According to the ABI,1 over 19 million households have home contents insurance and around 17 million have buildings insurance. Almost £10 million is paid out in claims to households each day. There are 26 million private vehicles insured in respect of which our industry pays £22 million per day, and 5.6 million pension annuities pay out at the rate of £33 million each day. But too many people miss out on the security our products offer. The protection and long-term savings gaps are too wide. Our research has shown that the UK pensions gap is the highest in Europe.2 It’s frustrating that millions are suffering hardship or worry due to a lack of savings or insurance. I have been lucky enough to deliver the cheque and see the dramatic impact that insurance can have. Some time ago I was running a company in Japan and one of my colleagues was diagnosed with cancer. As you'd expect, it was very sad and upsetting, and ultimately he passed away. However, the firm provided life cover insurance and he
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 UK  Insurance  –  Key  Facts,  ABI,  September  2011    UK  pensions  gap  amounts  to  £10,300  per  person  per  year.  Source:  Aviva’s  Mind  the  Gap,  2010    

had bought some extra cover. I could see just how valuable life insurance was in terms of helping his wife re-establish herself in Vancouver, and set up a small business. Insurance had a massive impact on that family's life. It’s a tragedy that not enough young people with dependents have adequate life insurance. I'm reminded of my best mate at school who trained to become a doctor. He married early and had five children. But one night, coming back from the hospital, he suffered a heart attack. With no insurance in place, his wife really struggled. With a new regulatory regime over the horizon now is a great time to think through what firms and the FCA need to do to build on the strengths of our current system and help more people benefit from insurance and savings. Before we do that, it is worth taking a step back to see what lessons can be learned from the last few years. Building on strong foundations There are some big changes happening in the industry, not least the implementation of the Retail Distribution Review (RDR) and the creation of the FCA. But there are strong and stable foundations on which we can make these reforms. The industry can be proud of how it has weathered the storms of recent years and of the reforms it has made. For a start, the sector has strong financial foundations. It is well capitalised and hasn’t cost taxpayers a penny during the financial crisis. The Treating Customers Fairly (TCF) agenda has had a huge positive impact. I can testify to the fact that it has changed the culture in firms and that Boards take it very seriously. Rules and regulations can be tightened, but they can also be gamed and avoided. The best way to get good consumer outcomes is not necessarily through more rules, but by firms having a strong culture of treating customers fairly. The recent LIBOR scandal shows what happens with the wrong culture. The TCF agenda has worked in the UK and is now being copied by other national regulators. Let’s not throw TCF away as part of regulatory reform. Together with the FCA we all need to keep building on this excellent programme.

The RDR offers a great platform on which to build a customer focussed and sustainable market. The abolition of commission on retail investment products, the requirement for higher minimum adviser qualifications and the heightened focus on professionalism will provide a stronger, safer environment for UK consumers. It will also, I predict, help attract increasing numbers of bright young professionals into this great business. I believe the most important part of the RDR is the more professional culture we are encouraging with, for example, the Codes of Ethics for advisers. Supervision is necessary, but values are key. Promoting integrity and honesty are vital if we are to achieve good consumer outcomes. Martin’s recent focus on poor sales incentive schemes shows that regulations alone cannot guarantee good outcomes for consumers – we need to continue to focus on the ethics of a firm and its people. But let’s remember that it is mis-selling that is the problem, not selling. People sometimes need to be nudged and encouraged to do what they know to be right. Speaking of nudges, I’m keen for the FCA to learn the lessons of behavioural finance, a subject we at Aviva are very interested in. Under the old orthodoxy, consumers were assumed to be rational individuals who would digest information and act on it. That’s why, there was so much stress on regulating product sales and insisting on ever expanding disclosure documents. We now know that approach doesn’t work. Both the FCA and firms need to ditch the classical economic model of consumers and truly understand consumers as they are. Our vision for the future Our vision is of responsible, financially capable consumers who can better access suitable products and advice in competitive, open markets. When they improve processes or design products, firms need to consider what their consumers want, and then ensure these products are clearly explained and perform as expected. Firms should have a culture of acting with integrity and treating their customers fairly, from top to bottom. I’m glad Martin has acknowledged that our industry has firmly embedded TCF.

I also think that there should be recognition, by Government and the regulators, that consumers benefit from having insurance and savings products that meet their needs. This means they should help, not hinder, people to understand and to access suitable products in a straightforward manner. The benefits of better access are material. Increasing savings helps individuals and families become more financially resilient and less prone to get into debt and less likely to be a burden on the state. Meanwhile, more capital would flow into the UK economy and infrastructure, so boosting UK plc. To be clear, I would rather see one million people benefit from perfectly adequate life or buildings insurance than see one thousand people take out the most finely tailored policies for their personal circumstances. Personally, I would like to see government policy and regulation reflect this kind of pragmatic philosophy. But trust is key. It is the industry’s biggest challenge right now. We need to demonstrate by our actions over a period of time that, in spite of past failures, we are once again focussing on our end customers and can be trusted to deliver. This is our leadership challenge. When someone wants life cover or flood insurance they should be confident that no matter whom they buy from they will not be ripped off and the firm will deliver on its promises.3 What can the industry do? What else can the industry do to help us move towards this vision? We need to innovate continually to improve the customer experience. Of course, the best way to learn is by listening to consumers. Like some other firms, we use “lean” or “Systems Thinking” to empower our staff to prevent bureaucracy and the status quo getting in the way of common sense and doing the right thing by our customers. It’s led to some spectacular results. When our staff used it to re-engineer our Life Policyholder contact centre they modified and/or removed 32 processes and complaints dropped from 200 to 47 per month. And our uphold rates are amongst the industry’s best! Another example. We’ve recently launched a free app, called ‘rate my drive’, that gives a snap shot of a person’s driving style built up over 200 miles of driving. We can then use


 Aviva  UK  Life  pays  out  99.7%  of  claims.  

this information to provide a personalised rate that could be up to 20% cheaper. Consumers are already using new technologies, and firms need to keep up with them to remain relevant. Many people benefit from bespoke advice and products. But many millions more would benefit from straightforward products, like life cover, that do what they say on the tin and can be bought directly. We can make our industry more accessible by simplifying our products, processes and communications. I support strongly the Sergeant Review on simple products and hope it has a real impact. I agree with Otto’s comments that various consumer initiatives, such as on the Open Market Option, and the determination to ensure there is true transparency on pension charges, show that the industry is already upping its game and that these are indicative of more to come. I endorse the new ABI commitments to action. The commitment to build on the simple products initiative by making the language used to describe insurance products easier to understand should lead to tangible benefits for consumers. I know that as a customer I would rather receive a three page document which tells me what I need to know, than a 30 page brochure which tells me what the firm needs to tell me to manage its future liability. I also support the ABI working with the FCA to develop a shared understanding of consumer behaviour. It must be the starting point for all our work as it will help us develop products and services that customers need and understand. For instance, consumers told us they wanted ‘no frills’ life cover which was not complicated by different options, so we designed a product that consumers could understand and take out in less than 20 minutes. Overall, we want to get to a consumer focused position, where we talk about products being bought by consumers, rather than distributed by firms. This requires a subtle, but significant shift in mind set.

Firms need to be able to have an open, honest and constructive relationship with the FCA. It’s vital that the industry and the FCA work together to rebuild trust and confidence in the market. What can the FCA do? I’d like to pick up on a key theme in the ABI’s report – that of public policy working well for consumers. I think it’s really important for the FCA to go with the grain of public policy. Debates continue about how to encourage saving, how to pay for long term care, how to simplify products. The FCA needs to be engaged in these debates, propose workable, consumer focused solutions and reflect them in its regulation. It can’t be right for individuals that it’s easier to get credit and go into debt than it is to save. Regulation should look at what can be done – safely – rather than what must not be done. Of course, the FCA needs to follow its objectives. But if Government wants to encourage more people to save more and be protected, then the FCA should recognise the benefits – to society and individuals - of consumers owning suitable products. Regulation needs to enable easy access to straightforward products. In turn, firms need to work harder to design their propositions around consumers and ensure they receive a fair deal. Conclusion I believe that there’s a lot of common ground between what the industry and the FCA wants to see and it is pleasing that with Martin’s approach we are off to a good start. Ultimately, it boils down to achieving good consumer outcomes for the greatest number of people in competitive and sustainable markets. I’d like to thank the ABI for putting some quality thinking behind this report and I am encouraged by the industry’s enthusiasm to take action. As I say, this report builds on the really good work done in the last few years by the regulator and firms to improve consumer outcomes. I now look forward to the industry, the FCA and the Ombudsman working together to continue to build confidence and trust in the sector. Thank you very much.