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Dr. Julian Lewis (New Forest, East): In just over a fortnight, more than 2,000 signatories have been added to the petition of Residents against Dibden Bay Port, including representatives of Fawley, Hythe and Dibden and Marchwood parish councils and Totton and Eling town council.
The Petitioners therefore request that the House of Commons urge the Secretary of State for Transport, Local Government and the Regions to delay the start of the Inquiry until the New Forest District Council can find a suitable venue close to the communities which are affected by the proposed development.
Mr. Barry Gardiner (Brent, North): I begin by reassuring my hon. Friend the Economic Secretary to the Treasury that I would quite understand if she began her response to our debate with the protest that we must stop meeting like this. During the past few weeks, I have detained the House, and my hon. Friend, in Adjournment debates with observations on the collapse of the Independent Insurance Company, the debacle of Equitable Life and now the collapse of Chester Street Insurance Holdings. Those are three bombshells that have hit the financial services industry particularly hard. They have prompted independent inquiries, appeals to the House of Lords, special industry compensation schemes and regulatory reviews. Above all, they have led to a severe undermining of confidence in the insurance industry, whose only tangible product, after all, is confidence itself.
Insurance gives us the confidence to engage in the commercial world without becoming paralysed by the potential liabilities that such engagement might bringthe confidence to employ staff whose work is intrinsically dangerous and the confidence to manufacture products, whose unforeseen failure would trigger crippling liabilities. In life assurance, it means the confidence to plan for a future that is financially secure beyond a lifetime of work.
The failure of these companies to furnish their policyholders with the benefits they undertook to provide has caused enormous distress and suffering. However, their failure goes further in so far as it has undermined confidence in the industry. By undermining that confidence, they have weakened the system of protection for everyone else.
I turn now to the failure of Chester Street Insurance Holdings. I have no intention of restating in detail the company's history. It is already known to the Minister and the House, and was the subject of an Adjournment debate in March. Stated simply, Chester Street Insurance Holdings Inc., after selling its interest in the subsidiary insurance company that was its main asset, concluded that it still was unlikely to be able to meet all its future liabilities. The company therefore proposed a scheme of arrangement under section 425 of the Companies Act 1985, and on 5 February this year creditors approved the scheme by the necessary 75 per cent. vote in favour. The declared percentage pay-out to creditors under the scheme was 5 per cent.
Chester Street's book of business was employers' liability which, since the Employers Liability (Compulsory Insurance) Act 1969 came into force in 1972, has been a compulsory insurance. Under the Policyholders Protection Act 1975, policyholders are protected by statute when an insurance company is unable to meet its liabilities. The Policyholders Protection Board pays 90 per cent. against valid claims for non-compulsory insurances through a fund raised by levy on the insurance industry. However, it pays compulsory insurances in full.
Where the employees' former employer was still in business, there was a prospect of hugely delayed and compromised payments. Where the former employer had subsequently gone into liquidation, the chance of recovery was virtually nil.
I commend the Government and the Association of British Insurers for the way in which they worked to put together a compensation scheme to benefit those individuals who fell between the stools of the PPB and Chester Street because they had contracted their illness prior to 1972 and found that they had no one to claim from because not just their insurer but their former employer had gone into liquidation.
The financial services compensation scheme announced by the ABI on 8 August this year is funded by a levy on insurance companies and will ensure that victims receive 90 per cent. of the value of their award in such cases. It is not quite the 100 per cent. provided for under the PPB, but for those who, less than a year ago, thought that they faced a maximum of 5 per cent. of their rightful claim, it is a tremendous and welcome improvement.
Although I do not want to minimise what has been achieved, the House must express its concern that the collapse of Chester Street is yet another major insurance failure, and that our financial regulation system failed so manifestly not only to anticipate it but to provide for it. The Government and the Financial Services Authority must look again at the regime of solvency and capital requirements placed on insurance companies. Later in my remarks, I shall direct the Minister's attention to those aspects.
First, I want to examine the paradox that is the Policyholders Protection Board itself. The PPB penalises good insurers and rewards bad ones. The insurance market is one of extreme competition where consumers have increasingly made the mistake of regarding insurance cover as a producta commodity that may as well be purchased from any providerand where the sole consideration is to achieve the lowest price. There will always be companies, such as Independent Insurance and Chester Street, that are desperate to win market share by slashing premiums to unsustainable levels or by paying unsustainable commissions to intermediaries.
Regulators need to address the fact that responsible insurance companies suffer a double jeopardy: not only do they lose business when those companies are trading, because they are not prepared to pursue business at any price, but they have to bail out the self-same companies by contributing to the PPB levy when they go under. The cost of that for major insurance companies runs into millions of pounds.
It has even been suggested that some brokers cited the PPB as a reason for not advising their clients to switch from Chester Street long ago. They said that even if the company failed, the PPB would still provide full cover, so it did not matter.
I grant that the current PPB framework makes the insurance industry self-funding and thus accountable, in aggregate, for its financial soundness. However, the operation of the PPB is ad hoc and inconsistent. Levies are raised only on an as-needs basis. Indeed, between 1993 and 2000 there were no levies. That means that levies are entirely unrelated to the risk that each insurance company is running. They are entirely unrelated to the expected economic cost that each company imposes on the rest of the industry by its own risk of failure.
The first result of that is freeloading: bad companies make a short-term profit, go bankrupt and contribute nothing to the industry levies that are required from the good companies to bail out the victims of bad companies. Secondly, there is a lack of regulatory incentives to improve risk management. As long as the industry is prepared to bail out the victims, the regulator fails to address the fundamental problems that produce the victims in the first place.
The Minister must focus on two aspects of regulatory failure. There is a lack of clear accountability for the funding of insurance failures. The ad hoc nature of the PPB levies combined with the potential for catastrophic losses that could result from several insurance company failures suggest that there is no clear accountability as to how such catastrophic losses might be funded. This year, the Government negotiated with the ABI. The FSA should be given that clear responsibility.
There is a lack of any analytical framework for assessing the aggregate financial condition of the insurance industry. At present, it is not possible to assess the likelihood of the failure of an individual insurance company in the UK. It is certainly not possible to assess the likelihood of multiple failures, hence it is not possible to assess the adequacy of the PPB fund, or to link its capitalisation to an explicitly defined level of confidence in the market. The FSA should be given that clear responsibility.
In order to fulfil that role the FSA will have to focus on key issues relating to the solvency regime and capital requirements. On 1 December, we will have a new single regulator with more extensive powers of intervention, a single ombudsman and compensation scheme, group solvency monitoring, earlier deadlines for the completion of annual returns and an approved persons regime. The recent consultation has indicated the FSA's intention to move towards a risk-based approach to regulation and to introduce an integrated prudential source plan. Those are formidable advances in the regulatory armoury, but they must be brought to bear on the following problems.
First, reserving is inconsistent. The FSA's failure to require any benchmarking of reserve levels to industry standards or loss ratios is a major problem. It is compounded by the freedom given to the actuaries and underwriters to manipulate their own reserve levels. In particular, external actuaries have only one very crude weapon in their armoury when they validate the reservesto refuse to sign off. As with most nuclear weapons, it is practically useless and hardly ever used.
Secondly, reinsurance standards are inadequate. The Minister is well aware of the ineffectiveness of regulation on such issues, and we have discussed before the way in which the Independent Insurance Company was legally able to reinsure its portfolio in an ultimately circular deal that ended up with a wholly owned subsidiary company of Independent itself. Indeed, 70 per cent. of Independent's outstandings were reinsured, for all the good that it did that company or its victims.
Thirdly, minimum regulatory solvency levels are inadequate. There are few better examples of gross regulatory failure than the fact that an insurer that held the minimum solvency margin would have approximately a one in 40 chance of insolvency every year. The failure to set formal target and intervention trigger levels for insurers means that the regulatory solvency margins do not have any material impact on the way that the insurance industry manages risk. I have had occasion before to disparage the European solvency margins in front of the Minister. It is clear to me from my discussions with the German insurance regulator that even the author of the infamous Muller report has difficulty in maintaining any longer that those solvency requirements are sound in principle and in practice.
Fourthly, there is a lack of differentiation. Solvency margins do not significantly differentiate the different risks run by different insurance companies. Required margins should vary according to premium income, by line of business.
I have presented the Minister with several detailed complaints and observations about how I consider that the insurance industry is failing the public and how the FSA, as regulator, is failing the industry. It is perhaps not incumbent on me to offer solutions to those problems, but, equally, it is only fair to those about whom my remarks are critical that I at least present a marker that can be shot at.
I believe that the FSA should establish ratings for individual insurance companies. Those ratings should be published and should take account of an insurer's risk profile and financial strength. Private sector rating agencies, such as Standard and Poor's, already measure each insurer's financial strength, but the main problem with most of those commercial rating agencies is that they are based on primarily public information and do not reflect internal information about the controls and processes to which a regulator should have access. Moreover, rating agencies do not have the same resources as regulators. S and P has only a handful of people covering the entire United Kingdom insurance sector. There is no reason why regulatory financial strength ratings would not be possible, and I believe that they would represent a significant improvement on the current regulatory minima and private sector ratings.
I believe that the FSA should ensure that there is accountability in the industry for solvency. In particular, the industry as a whole should finance all the costs associated with insurance failures with no subsidy, explicit or implicit, from the taxpayer. The fund for that should be reviewed annually on the basis of the FSA's assessment of the aggregate financial conditions of the industry.
To enable it to do that, the FSA needs to have its performance measured in a way that is aligned with its accountability for the stability and soundness of the insurance industry. That will give it an incentive to take a more robust and sophisticated approach. An effective regulatory framework should not just incorporate a rules-based system, as is currently the case, but should balance that against a bottom-up supervision of reserving and internal risk models and controls.
The current regulatory framework allows cases such as Chester Street to go unanticipated and poorly provided for. Companies such as Chester Street and the Independent Insurance Company are able consistently to under-capitalise themselves and get away with poor or minimal risk management techniques. When they realise their losses and collapse, they leave the better companies in the industry, the Government and the public to pick up the bill. The current situation is bad for the public, bad for the industry and does not provide the country with the systemic stability and financial security that it needs.
At the beginning of my remarks, I suggested that it would be understandable if, in my hon. Friend's response, she were to express the hope that we might stop meeting like this. I would certainly share that hope, not because I do not enjoy spending time with her but because we all want an end to the spate of disasters that has struck the insurance industry and resulted in our recent debates. I hope that she will also indicate that she considers that the remedies I have proposed may be of some help in preventing future failures. What is far more important, though, is that she should suggest that she shares my analysis of the problem and that she should commit our Government to tackling it.