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How far should the state support the insurance industry?

February 16, 2016

State support of the insurance industry? In Conservative Britain in 2016? Unthinkable? To many people the questions might stop there – but they shouldn’t.

The state already stands behind the insurance industry in several key areas and there are suggestions that it should do more, especially helping extend the availability of affordable flood insurance to small businesses, leaseholders and others not covered by Flood Re and to facilitate the provision of insurance for an ill-defined basket of cyber risks.

Of course, the Treasury already ultimately stands behind Flood Re although with mechanisms to pass most of the costs back to the insurance industry, but this is no isolated example of government intervention in insurance in the UK when the market fails. For many years there has been a Treasury-backed reinsurance guarantee for long-term export credit insurance and terrorism cover was abandoned by the commercial market in the mid-1990s and replaced by Pool Re.

Risk and fearAll of these seemly unrelated areas have the common feature of risks that have become too large, too difficult to quantify and measure using traditional underwriting and pricing mechanisms. In short, the market has failed in these areas and so the state has – very reluctantly – stepped in, albeit keeping its involvement at as long an arm’s length as it can.

These challenges are not going to go away or diminish in scale and scope. We live in an increasingly volatile, unstable world and one where risks are getting more concentrated and bigger by the day. Many of these risks are growing beyond the ability of established  insurance mechanisms to cope with. Yet, in almost all cases, commerce and society can’t function effectively without the back-up of insurance.

You can add into this mix the challenges of providing affordable, accessible health and social care to aging populations, a clear example of current public and private sector failure.

I don’t know what other risks will be next to be added to the list that insurers and reinsurers feel unable to manage but I do know that climate change, geo-political instability, terrorism, the growth of mega-cities, mass migration, dependence on technology and changing demographics will all play a part in creating risks that are beyond the capability of the insurance industry to underwrite without threatening its own existence.

We need to find a new settlement between state and the private sector that acknowledges the extent of these threats and the complete absence of mechanisms to cope with them. I am not optimistic as we have a government that sees only a diminishing role for the state and an insurance industry reluctant to be be realistic in acknowledging its limitations.



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