We already knew the depth of incompetence displayed by the Financial Conduct Authority during last year’s exit-fee shambles.
Quick recap: in search of flattering headlines, the regulator overbriefed a story to the Telegraph and watched as insurers’ share prices plunged.
It took until the next afternoon for the FCA to clarify its modest ambitions. It was merely looking to see if there was a problem with exit fees on old insurance policies, rather than taking action that might whack insurers’ profits. In effect, the FCA created a false market, the very sin it is meant to prevent others committing.
The question now is whether the FCA has learned its lessons and digested the findings of an outside lawyer from Clifford Chance. Andrew Tyrie’s Treasury select committee has doubts: “It is not clear that the FCA has yet fully grasped the extent of the failings revealed by Simon Davis’s report.” That will sting.
The committee is demanding that the board of the FCA commission a review of its own effectiveness. Together with other measures, it calls this “an examination of whether the FCA is suffering from a systemic weakness in standards and culture”. In plain English, MPs want evidence that the FCA is up to the job.
That seems fair. A suspicious subplot to the saga was the FCA’s bizarre decision to unveil its strategic restructuring two days before the Davis report was published last December. Clive Adamson, head of supervision, and press chief Zitah McMillan – two people criticised by Davis – left the FCA but the regulator denied their exits were related to the affair.
As the MPs’ report says, it looked like another “contrived media-handling operation” to create the impression that the pair were being blamed while claiming otherwise. The FCA’s timing was either cack-handed or petulant.
The best remedy is to ensure the external review is thorough and professional. FCA chairman John Griffith-Jones should appoint somebody who is properly independent and experienced and may say more things the regulator doesn’t like. Financial regulation is a serious business and a full health-check is legitimate.
Uncharted waters for Lloyd’s
There are two ways – both legitimate – to view the same-again profit of £3.2bn recorded by the Lloyd’s of London insurance market in 2014. First, this was another impressive result in the face of stiff competition. Second, a return on capital of 14.7% feels fragile.
On the first point, Lloyd’s deserves credit, even in a benign year for natural catastrophes. It successfully walked the thin line between chasing growth in new markets and retaining underwriting discipline.
Lloyd’s is opening new offices around the globe, from China to Mexico, but gross written premiums were actually a smidgeon lower than in 2013. That suggests some business is being turned away as too risky. Indeed, Lloyd’s reckons its combined ratio (how much premium income is paid out in claims and expenses) of 88.1% was five percentage points better than its peers’.
Jolly good, but underwriting discipline offers only partial protection when natural disasters come in droves. The last really bad year was 2011, which brought floods in Thailand and Australia, the New Zealand earthquake and the Japanese tsunami. That year Lloyd’s lost £500m, a reasonable outcome in the circumstances.
Would it cope so well today? On current form, it would do better than competitors and the capital position is robust. But the worry in this industry is that risk is being severely mispriced in a low-interest world. Hedge funds and others, attracted by the sight of double-digit returns, are piling into the insurance market and driving premiums lower, or keeping them low.
It is the job of Lloyd’s bosses to sound cautious. But chief executive Inga Beale’s remarks should be taken seriously. She said “the consensus is that prices need to rise to reflect increased exposures and risks in the market and the pressures on investment income.” But then she said this probably won’t happen: “Excess capital and intense competition make broad-based price increases unlikely.”
Quantitative easing has blown many bubbles in financial markets. Specialist insurance and reinsurance may be one.
Alliance hangs on, barely
It’s still early days in the punch-up between Alliance Trust and Elliott, the activist New York hedge fund that has proposed three non-executives to the board of the Dundee-based investment trust. But let’s hope the argument doesn’t become too bogged down in investment performance statistics. Alliance hasn’t been great over three or five years, but it’s improving.
What shareholders really want to know is if Elliott is really trying to exit its holding by forcing a tender offer above Alliance’s share price. Instead of grumbling about “highly personal attacks,” the hedge fund should provide clarity.
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