Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 20-39)

TUESDAY 29 OCTOBER 2002

RT HON PATRICIA HEWITT MP

  20. We lose out both ways; they have lower costs and they have higher skills. Certainly when the Spanish and Portuguese came in, they had lower skills and higher prices and a better standard of living, so that it is a triple whammy you might say.
  (Ms Hewitt) The southern European countries compared with us at the time, yes, had lower skills, lower productivity, but also clearly significantly lower wage and non-wage labour costs. It is a different picture with the accession countries but still that issue of a challenge undoubtedly to our manufacturers, a further challenge to us to raise our game on productivity and on innovation because that is where we will compete. We are not going to compete against Poland or the Czech Republic, or against Morocco, Indonesia or wherever, on the basis of low wages, low margins and low value-added goods. It is very much about innovation and quality and moving our manufacturing companies up the value-added chain, which is why we are doing all the stuff we set out in the strategy, and the fact of accession in 14 months time just makes the rest of this work all the more urgent.

Linda Perham

  21. Can I ask about small businesses? The cross-cutting review a few weeks ago recommended that government services aimed at encouraging entrepreneurship are more consciously designed to help remove barriers to groups currently under-represented in business. Three of the 39 steps you talk about are: the Inland Revenue, Customs and the SBS examining self-employment registration forms and VAT returns. What more could be done to identify and encourage these groups, which would be gender, ethnicity and disability groups?
  (Ms Hewitt) First of all, we have the Inland Revenue, Customs and the Small Business Service working very closely together—and this will broaden out into other government departments as well—to make sure that there is single seamless advice for somebody who wants to start up in business. We are making some real improvements there. For instance, we are just about to announce, and you have pre-empted something that Nigel Griffiths, my Small Business Minister, has been working on with Shell to run the Livewire Scheme for young entrepreneurs. We are working on a single, simple, start-up pack for young entrepreneurs. We are working, as I say, with Inland Revenue and Customs to ensure that both electronically and in hard copy, which some people still prefer, we have the advice that people need when they are starting up in business, and as simple as we can possibly make it, so that people know from the outset what they need to do, for instance to comply with employment law, if they are going to start immediately employing somebody, but also the support and help that we can offer them. We have tried to make that as simple as possible. I do not know if you have had a chance to look on the latest version of the UK-Online website, but there you will see that we have a section on starting as a self-employed person. That is what we are trying to do much more broadly. As well as that, we have got the Phoenix Fund, which is very successful, and I got another £20 million for that out of the Spending Review. With the Phoenix Fund we are supporting a whole range of initiatives and organisations which are working either in the very disadvantaged, low income community or working with groups that are under-represented in business, particularly some of our minority ethnic communities but also women, older people and so on. Those are starting to show results and we are tracking that through. I have also made it very clear to all business links operators that we expect them not just to work with the customers as they have always worked, but to reach out to minority communities in their particular area to get out there and find the women entrepreneurs whose potential is being lost. We have reminded them of the OECD study, the Global Entrepreneurship Monitor Study that recently came out, which said that the fastest and most sensible way to raise the start-up rate in an economy, to raise the entrepreneurship level, is to target women. America is one of the very few countries where half the start-ups are coming from women. In Britain it is about one-third. In many other European countries it is less than that. We can be quite confident that there is a lot of entrepreneurial potential out there and we need to reach it. Indeed tomorrow I am helping to launch an organisation called Prowess, which is specifically about support for women entrepreneurs. We will be measuring the business links in part on their success in getting out into those under-represented groups.

  22. Does the fact that there has had to be this cross-cutting review mean that the SBS was not getting it right up to now?
  (Ms Hewitt) No, I do not think so at all. The SBS is still a relatively new organisation. Their first challenge, which was quite huge, was to reorganise, slim down and sort out the entire Business Links network. That was very much where they focussed their work. The cost-cutting review, for which I was a travelling minister, and the SBS was very closely engaged in that, has been hugely helpful. It gives the SBS the position it needs to act right across government and ensure that instead of different government departments having different channels to SMEs and all bombarding them from different directions or offering so many different initiatives that nobody could find their way through them, it is all done in a simplified, streamlined way with the SBS. The test for that change is just bringing it all together.

Andrew Lansley

  23. I think small businesses would be surprised to see that none of the 39 recommendations in the cross-cutting review were directly related to trying to reduce the administrative burden of compliance on small businesses. One of the points we made was a concern about the cumulative burden of regulations on businesses, particularly as they impacted on SMEs. Whilst the Department responded to that, it neither acknowledged nor responded directly to that point about the cumulative burden. The question really is: do you recognise that the issue is not simply about individual regulations and best practice, but about the cumulative burden and its disproportionate impact on SMEs and the need to secure exemptions for small businesses from some of these burdens, as we recommended in our report?
  (Ms Hewitt) I completely agree with you about the cumulative effect, and that is very much the issue. Of course, I recognise that. As far as I am concerned, in a sense, the whole of the cross-cutting review was about how we make it easier for small firms to do business in the market, both in terms of compliance—paying employment or paying taxes and so on—but more importantly in terms of gaining support from government to make it as easy as possible and to raise the chance that those businesses will be successful. Out of that cross-cutting review comes the work that the SBS is taking forward with the Inland Revenue and Customs and Excise initially but gradually with a much larger range of agencies. That has been very important, but of course we also have the work of William Sargent in his new role as Chairman of the Small Business Council, and David Arculus, the Regulator of the Small Business Task Force and panel. In terms of what the answer to the problem is, one of the difficulties is that of course when you ask a small business where are the worst problems, they say that it is the cumulative effect. In order to deal with the problem, you have got, as it were, to cut the elephant into bite-sized chunks, so that you have to deal with individual regulations; you have to sort out weights and measures, for instance; you have to deal with the complex set of regulations that affect small businesses in the food and restaurant trade, for instance. You do have to deal with it chunk by chunk. But what you can also do is make it much easier for small businesses to get the information that they need and not to flood them with information that they do not need. That is very much what this joint project is about: it is making sure, particularly using electronic means, that an SME, for instance in the hotel and restaurant business, gets information about regulations that affects it, but does not get irrelevant stuff or, worse still, it does not find itself inadvertently not complying with something because it simply has not heard about. I think we can make it much easier to get the right information to the right business at the right time.

  24. So if you are accepting the proposition that the cumulative burden of regulation is important and bears disproportionately on small businesses, what specific proposals are you planning to reduce the burden of regulation on small businesses? Have you any specific proposals to present to small business or to operate any decreases in regulation? We debated in the House only last week something that would impose about £1.4 billion worth of additional costs. Is there some offsetting proposal in relation to that?
  (Ms Hewitt) One has to be quite careful about this business of simply saying that exempting small businesses is the answer to the problem. In some cases, it is entirely appropriate. For instance, we have very substantially raised the threshold for statutory audit and we have exempted a lot of small businesses or small companies from the need to do a statutory audit as a result of that. Gordon Brown has continued to raise the VAT threshold—and we have one of the highest in Europe—so that we do not burden the smaller companies or the smaller firm unnecessarily with VAT. We have been pressing very hard, for instance within the European Union, on the Waste Electrical Directive for an exemption for the large number of small producers and retailers who are responsible for a very small part of the waste. We have not won that argument yet but we continue to make it. We exempted a very large number of small firms with employees fewer than five from the shareholder pension requirements. Each of those was absolutely the right thing to do. Indeed, after consultation, we were happy to agree to that Directive, in part because it did not apply to any business with fewer than 50 employees, which of course was the vast majority of business in our country. But I am not in favour of a blanket exception for small firms, either from employment regulations or anything else, not least because small firms themselves are telling us they do not want that. Most of them are quite worried about the idea of being badged as a sort of second class employer or suddenly coming to a threshold where perhaps they go from five to six or from 10 to 11, or whatever, and they then have to take on everything at once. I think the case-by-case approach to exemption is a more sensible one, coupled with what we are doing to simplify different packages of regulations, and to simplify the way in which Government and small businesses do business with each other and the information and compliance procedures we give them.

  25. Do you measure the cumulative burden of regulation on small businesses?
  (Ms Hewitt) We do it through the regulatory impact assessments, so that we have not perfect but better than most other countries regulatory impact assessments on every proposal. Of course, we can see what the cumulative burden is. As we spread the whole philosophy of "think small first", which is very much the philosophy we are trying to ingrain right across Whitehall, we want to change the regulatory culture so that we are sitting down with small businesses in the sector or of the kind that are most likely to be affected, at quite an early stage to discuss what is the problem for which a regulatory solution is being proposed; are there better ways of dealing with this problem; and, if regulation is being envisaged, either by our own Government or by the European Union, how can we do this in the most sensible and light touch way possible that gets the results we want without damaging the competitiveness and growth of small firms? The other thing I would mention is that one of the very regular complaints we got from small firms was about the complexity of maternity pay and leave. Most small firms only deal with this once every few years, so they learn to do it once and then forget about it and then it comes along again. It is appalling, if you have ever had to deal with it; it was very complicated. We have radically simplified maternity pay and leave regulation as part of the reform package in the Employment Act that has just gone through. That will come into effect next April. By raising the threshold, in other words by bringing far more small businesses into the net for the 105% rebate we give them on statutory maternity pay, we have actually doubled the number of small businesses which qualify for that enhanced rebate at the same time as we have hugely simplified the administrative burden for them of dealing with an employee on maternity leave.

Ashok Kumar

  26. Secretary of State, initially in your earlier statement to the Chairman you placed a lot of emphasis on success and failure of the Government's Manufacturing Strategy on science and innovation and the key focus of that strategy. You use words like "building on our science base" and you make other emphases. I want to explore that with you. Given that that is the basis of success and failure, how is this going to work with the RDAs? How is the administration of this fund with different competing RDAs going to take place? I know you are getting a new Director General, as you have said. I cannot work it out from this document. You make reference to two different areas, the-North-East and the Yorkshire/Humberside, on page 32, and you give examples. Has the fund been set up for all these different areas of the country? How is it going to work in practice? I am not clear from this document what the targets are, the timescale and how you are going to make an assessment at different times as to whether it is working or not, given that you hinge everything on the basis of success on the strategy of this particular fund. Are the RDAs working autonomously or in clusters and networks? How are they being coordinated together, if they are working in that fashion? I am not clear from this document how this is going to happen.
  (Ms Hewitt) That is very helpful feedback. We clearly need to explain it better, and we will think about ways in which we can do that. The Regional Innovation Fund is only one of a whole number of instruments that we have got to drive up innovation and performance within the economy. Some of it, a great deal of it I hope, will be done within regions, led by a regional development agency. Some of that will be done pretty much within an individual region. For instance, we have got at Sheffield an RDA-backed Centre of Metals Excellence, building on the work of the Metallurgy Department at the University of Sheffield, but bringing in Boeing, one of our key inward investors, who came precisely because of the excellence of that university. We now see a centre of excellent with a business park around it and so on. That was very much done within that region and linking the strengths they had within that particular sector and expanding it. There are many other examples of that. In other cases, we have several RDAs working together because a particular industry, a particular sector, may well be important to a number of different regions. One example of that is the Motor Sports sector, which Mr Burden has a particular interest in, which crosses two or three different RDAs. They are now working together with the Motor Sports Panel that I chair to look at what we need to do really to exploit the excellence that we have in that cluster and also fend off some of the threats perhaps to that position. In textiles, we have I think four RDAs collaborating. They all have important textile sectors; they are all interested in the transition to technical textiles and higher value-added goods. Across the piece, we do indeed get all the RDAs working together in order to ensure that they are sharing best practice, they are learning lessons from mistakes, but they are also learning lessons from success, and in particular, they are not reinventing the wheel and they are not setting up isolated initiatives for the same sector where one centre of excellence will do very well and can serve more than one region. As far as the Regional Innovation Fund itself goes, perhaps I should have explained that more clearly, and I am sorry it is not in here, but that has now been absorbed within the single pot that we have given the Regional Development Agencies. Instead of the RDAs having to bid for or use all these different streams of funding, which just made life very complicated and constrained them quite unnecessarily, we have given them the freedom and the increased funding of the single pot, so that they can now, in line with their strategy and in line with the targets they have agreed with us, deploy their resources to what they think is going to be the most important and most effective investment. They will, of course, be accountable for achieving the targets, and we are going through their business plans at the moment. A final point I would make comes back to the national dimension of the innovation strategy. Part of what the Innovation Group and David Hughes and his team will do is to focus on the real breakthrough technologies that are going to transform different sectors and companies in ways that we are only just beginning to imagine. One of those is nanotechnology. We are putting a lot of money behind the exploitation of nanotechnology, with the creation of academic centres of excellence and also the new Nanotechnology Application Centre. Some of the most exciting developments are going on in Britain but, if we do not exploit them in the form of new products and new processes, we will simply miss the boat on the new sources of prosperity.

  27. Can I just come back, Secretary of State. Thank you for that explanation. Are you going to judge the success of this fund, as you said at the end, by the number of products? Are you going to say five new products or say X number of products are being developed so this has been a success?
  (Ms Hewitt) Okay.

  28. Or if you get less than that it is not. It is the measure of that success that I am trying to identify because you are hanging so much on this approach. I recognise the difficulties but nevertheless it is important that this fund is accurately assessed and evaluated. You have said that it has gone in the main pot but it just does not finish up another chunk of money and we do not have substantial evidence to demonstrate.
  (Ms Hewitt) It is not this fund that we will be evaluating because we are moving away from having all these different funding streams and all these different schemes and evaluating each one individually, it is just a mess and we have been sorting it out. The way in which we will measure the success of the innovation strategy, which is what matters here, there are a number of different measures. First of all the spin-offs that we get out of the science base. We have seen a huge increase, trebling over the last three years, a massive increase and we want to see that continue to go up. Secondly, we will want to look at the number of existing manufacturing companies who are entering into new partnerships with the science and technology base in order to raise their own rate of innovation. Now we can measure that partly by just looking at the companies and what they are doing but there is a very powerful measure, also, it is in the Manufacturing Strategy, which is the proportion of revenue for manufacturing companies that comes from products introduced in the last three years. That is a pretty key benchmark. We perform quite poorly compared with the European average. It is a pretty good rule of thumb that our best companies are retiring their old products, they are creating new products and new production processes and we will want to measure that and see if we can get that driven up. Then, obviously, we have touched on much broader issues like inward investment but, in part, our inward investment success will reflect our success in innovation as well.

Mr Djanogly

  29. In relation to the skills gap, if I could just give an anecdote. I go round factories in my constituency where there is low unemployment and they feel they are suffering very badly by the lack of skills, particularly young people coming in. It is a very big problem, as I am sure you find, Secretary of State, right across certain parts of the country. Now the problem seems to be worse by the fact that when I ask them "Do you go to local schools? What is the relationship you have with local schools?" not only do I find generally the answer to be negative but they say that very often not only are they not welcome but when they offer to go to the schools and speak to the students they are turned away because they think that because schools get paid on a per capita basis the schools are frightened that they may take away their potential sixth formers for what are admittedly very good apprenticeships. It seems to me something is not working here. Is your workforce development strategy going to address this type of issue?
  (Ms Hewitt) Absolutely. The skills issue is an enormous problem and because we have been so successful in bringing unemployment down, we have got a very tight labour market in many parts of the country, it is a real challenge to employers very often to get the skilled people whom they need. Now what I find in my own visits to manufacturers is that they hugely welcome and many of them are using modern apprenticeships. I think we are getting very good feedback on the modern apprenticeships programme. What we need to do, of course, is to drive up the numbers of people going into modern apprenticeships so that it becomes really a very big part of the route for young people who are not going on to university. Certainly we have got more to do there, which of course DfES is in the lead on. As far as schools go, as you know we have been looking at the whole of the 14 to 19 curriculum because as a country for a very long time we have been much, much better at the academic track than at the vocational track. They were going on about this 150 years ago and we do not want them going on about it for in another 150 years' time.

  30. There are a lot more people going to university now.
  (Ms Hewitt) There are.

  31. There is a large number doing academic degrees who probably are not suited to it.
  (Ms Hewitt) Well, I do not accept that for a minute. I see it in my own disadvantaged council estate neighbourhoods where nobody in those schools has ever gone to university. Then you meet people, as it were the older generation from those estates, who through adult learning opportunities have got degrees. I was at Jaguar yesterday and they were talking about this very issue. The plant manager was saying "What we are putting in place is a system which will enable a shop floor worker to go right through to a masters degree and, indeed, for that matter, to PhD level as well." They have shop floor workers who never got the chance to go to university when they were at school who have now got degree level qualifications. There is a huge wealth of unused talent in this country which has frankly not been used because of our past system. Of course those people should be going to university and we should be celebrating the fact that we are getting far more of them to university now but we have to be equally good at the vocational route and creating the technically qualified people because that missing middle is one of the very big reasons for our productivity and prosperity gap. That is very well illustrated I think in the table in the strategy. As David Miliband said recently we have still got a lot more left to do on this 14 to 19 curriculum reform. That work is in hand, there is still a long way to go.

  32. Are you working with the Department for Education on that?
  (Ms Hewitt) Yes, of course we are, just as we have been working with the Department for Education on links between business and schools because what we have, as the Howard Davies review showed very clearly, is a plethora of schemes—often very, very good, there is some wonderful practice going on in these schools—but it is patchy and it is inconsistent. We need to build more effective relationships so that every school is welcoming business into a school, it is forging those relationships which in turn means that young people, particularly through good quality work experience, can see the job opportunities, including the job opportunities in manufacturing, that are out there and then pursue an appropriate route to the qualifications that they need. I do welcome the fact also that as well as DfES and ourselves and Treasury we have got a growing number of businesses partnering with us and doing some very innovative things. Transco, for instance, particularly in Reading, have found it impossible to get gas fitters and they are desperate for gas fitters. This is a matter of some concern for safety reasons as well. What they have done is to create a partnership within that community where they get youngsters who have effectively dropped out of school and embarked on a life of possibly lucrative crime and they are taking them through the New Deal and through a training programme with a guarantee of a job at the end if they qualify. The starting rate for that gas fitter job is £22,000 a year. As the Chairman said, it is enough to get them off drugs and drug dealing.

  33. Secretary of State, you are giving some good examples of innovative companies thinking round the problem, which is good to hear. On the other hand our concern here to some extent is that we have joined-up thinking in Government.
  (Ms Hewitt) Absolutely.

  34. For instance the Workforce Development Strategy, is that likely to be coming out soon?
  (Ms Hewitt) Yes, I do not think we have settled on the publication date but my own Department is involved very closely in that and we are building on the work the Strategy Unit did on Workforce Development. We have a very direct interest in it, both from the point of view of businesses that are being held back and from the point of view of Business Link who of course deliver programmes like Investors in People for a number of SMEs.

Chairman

  35. Secretary of State, we have one or two issues we would just like to deal with very briefly. The first one is the issue of British Energy. We realise it is quite a complex issue and it is sensitive. We were a wee bit concerned that as the single shareholder in BNFL that at the weekend the story came out they were not getting their bills paid. To what extent have you been batting for them or have you been leaving the players to get on together and discuss it? That was a small issue. The other one is the question of fiscal remedies. It has been suggested that the nuclear industry should be exempt from the Climate Change Levy. I can imagine that so many people have invested so much in the Climate Change Levy that the idea of changing it might be anathema; but if that was the case is there any other option, like a carbon tax, which could be used to bring some kind of fiscal clarity and you might obviously adjust this to the energy business as far as emissions and carbon utilisation is concerned? I think it is also the case that we are a bit concerned that very substantial amounts of government money have been made available. It is not clear whether or not the money has actually been spent or is merely a facility, perhaps you could put on the record what the position is there. Lastly on this issue, I think we would want to give you notice that we will be inviting your colleague, Brian Wilson, the Minister for Energy, to come and speak to us, probably sooner rather than later. We would like to hear from you something of the events of the summer, as Harold Macmillan might have put it.
  (Ms Hewitt) Thank you for that invitation. We certainly live in interesting times. Starting with your very first point, a relatively minor issue, as far as BNFL is concerned we pursue a very deliberate policy of leaving the management to get on with running the company. We made it very clear to BNFL during the summer and the earlier negotiations with British Energy that BNFL and its board should take a view on what was in the commercial interests of BNFL as a company and in doing that I believe we were acting properly as a shareholder, not trying to second-guess management or run the company on a day-to-day basis but preserving the interests of the shareholder, in other words taxpayers. The same goes for continuing discussions between BNFL and British Energy. As far as the Climate Change Levy goes, as I said recently we have no plans to exempt nuclear power from the Climate Change Levy. The whole policy rationale for the Climate Change Levy was set out very extensively; indeed when I was Economic Secretary at the Treasury, for the introduction of the Climate Change Levy. It is absolutely designed to encourage investment in new good quality renewable plant. The much larger issues about carbon tax, the European Emissions Trading Scheme and so on, are all, of course, issues that we are looking at for the Energy White Paper which will come out at the turn of the year. We are looking at these very large issues but they are not being driven by the particular events at British Energy. As far as British Energy is concerned, and as you rightly say this is a sensitive issue, I decided to give a very significant financial facility to British Energy for two very simple reasons. One is because I have the responsibility as Secretary of State of ensuring that nuclear generation remains safe, a responsibility that of course I share with the regulators, and I also have responsibility as Secretary of State jointly with the regulator, with OFGEM, for maintaining security of electricity supplies. British Energy cannot, therefore, be treated just like any other energy company, as some were urging us to do, because on the one hand it has nuclear power stations and we have the ultimate responsibility for ensuring the safety of those stations and, secondly, because it is generating, supplying, some 20% of the total electricity market, so there are significant security of supply issues there. We decided for that reason to put in place a short-term loan, initially for four weeks while we entered into discussions with them, and then, as I announced recently, extended until 29 November to secure those two objectives of safety and security of supply and to put in place or to make the initial decisions on the longer term restructuring plan. I do not at this stage know what those decisions are going to be, we still have some weeks of intensively hard work to go, but obviously before 29 November when the current facility runs out I will be asking the Speaker's permission to make a full statement to the House on this subject. Of course, Brian will be delighted to come along and discuss all that in detail with you. Let me stress that this is a facility that we have put in place. We have not handed over taxpayers' cash to the company. We have put in place a facility and we have put in place extremely tough controls on the use of that facility so that our accountancy advisors, Deloitte & Touche, actually check any use of that facility. Quite a bit of it is being used simply for counter-party guarantees so that British Energy can continue to trade on NETA because otherwise parts of our electricity supply would cease. Where there is a question of paying invoices, for instance, all of that is checked by us before funds are released from the special account that has been set up to handle the funds. This is not a question of my signing a single cheque for a frighteningly large sum of money and then leaving the company to get on with spending it, it is nothing of the kind. In addition, of course, both originally and when we extended the facility, we succeeded in taking security over the assets of the companies involved, the holding company and the various subsidiaries, to ensure that we became the number one creditor in the queue of creditors that are involved in this situation.

  36. Would it be possible for you to provide a copy of the terms of the facility and put it in the library or to let us see it?
  (Ms Hewitt) No, I regret to say, Chairman, that it would not. They are commercially confidential and it would be up to British Energy to decide whether it wishes to make the details public. If there are further detailed questions that the Committee has on the issue of controls or how we are protecting taxpayers' interests then I will be very happy to do a separate note and to give you as much information as we can without breaching the commercial confidentiality or damaging the commercial position of a company that is continuing to trade.

  Chairman: We may well take that up. We will have to discuss that. We are grateful for the qualified response which you have given us to that question. We would like to move on briefly to employer liability and insurance. We would like, if we have time, to touch on the Post Office and company pension schemes.

Mr Lansley

  37. In the interests of brevity I will confine myself to one question. On the assumption that the Department is fully involved with the Treasury and the Association of British Insurers and others in discussions about the problems associated with employers' liability insurance, is there anything you can tell us about what the Department of Trade and Industry's objective is in those discussions? Is it to reduce the prospective liabilities which insurers would have to meet or is it to try and encourage greater competition amongst insurers so that the costs that are arising in terms of increased premia are not as prohibitive as some particular companies at risk have found them to be?
  (Ms Hewitt) I think we would say we have got a two-fold interest. One is obviously to ensure that there is a competitive and well-functioning market in the supply of insurance to employers and companies. The other is to ensure that the business voice is heard loud and clear in the discussions and in the review that is going on and that is why we are working so closely with the Treasury on this matter. I am sure that every Member of this Committee has had the experience that I have had in my own constituency, as well as the conversations I have had as Secretary of State, with companies who are facing the most appalling increases in their insurance premia. Unfortunately this reflects some very large difficulties in the insurance market that will no doubt be compounded by the events of the weekend and the claims to which that is going to give rise, the storm that we have had. It is very difficult in the insurance market at the moment. We are very concerned about what is happening to companies but, of course, because it is financial services it is a matter on which the Treasury leads and we are simply working very closely with them to see what, if anything, can be done.

Chairman

  38. If it happened in some industries that would be called cross subsidisation.
  (Ms Hewitt) I think the problem that we have got is, first of all, one very large insurance company has gone out of business. Secondly, the insurance companies have been affected, as many others have been, by the downturn of the stock market, thirdly in some sectors there has been a very significant increase in claims and fourthly, a lot of the insurers are reporting a general increase in claims and in litigation. All of that is being reflected in various proportions for different companies and different sectors in the rise in the premiums that employers are facing now.

Mr Lansley

  39. I said I will not go on so I will not. Can I just make one point? In many of these things which are being said to you, and that you are reflecting in the Department's responses, is a characterisation of the problem as past claims and losses have accumulated in ways which require future premiums to go up. Now in other industries you make losses, you do not necessarily have the freedom to pass them on to future customers, only the insurance industry seems to think that it works in quite that way. The first of your objectives, a proper functioning competitive market, would mean there are some insurers who make losses who are not going to be as competitive with others who are coming into the market who have not made those losses.
  (Ms Hewitt) That is true, certainly. Fundamentally here we are looking at the financial health of the companies as well as the number of companies who are competing in this market. Of course a number of employers are finding that their broker, however hard they try, can only get one company to give them a quote.


 
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