Refining ideas of the past: a friend was intrigued with the words “splendidly boring” that I used in a recent communication and this led on to a conversation about the use of words in the highly regulated game of insurance.
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The FCA (Financial Conduct Authority) – the (new) regulator of UK insurance – appear to have blundered big time and have been impressively unimpressive with the FCA’s first 12 months. Their first anniversary was described as their “finest hour” when they prematurely released price-sensitive information about its planned insurance sector review. A senior FCA figure prompted speculation that their forthcoming probe could lead to changes that would – wait for it – “affect the profitability of insurers” – and promptly triggered a sharp fall in the share prices of many top insurers!
The FCA feel that in certain sectors of insurance companies are making too much money and it is not fair on the consumer. The answer, therefore, is to make insurance companies reduce their premiums. Problem solved…? …Errr not exactly! The FCA rather missed the “basics” of the industry – loss ratios and distribution methods.
Insurers won’t want the loss ratios affected so the cover provided by certain policies will become more restricted. Distributors will make less commission – so will compensate by charging more fees. The result will be the same price, less consumer choice and more restricted policies. By trying to dictate basic market forces the FCA are prejudicing not only their own standing but the very policyholders they are there to protect first and foremost!
With the onset of the most technically complicated racecars yet, F1 has become even more expensive. This development of complicated racecars will lead to more efficient road cars for you and I – or that is the theory. However, if budgets interfere with the end result will become compromised. F1 is the most elitist show in the world. The teams at the back of the grid will never compete with Mercedes or Ferrari, but then their business model is different anyway but for F1 budgets to be “regulated” somehow – while the intentions are plausible – is this not rather missing the point as to what F1 is supposed to be about these days?
Some years ago I found myself at the forefront of the development of motorsport bonus insurance. It was a derivative of Prize Indemnity – win a car if you get a hole on one etc. The difference here was the claim was a gamble on the results of the team or driver. Sometimes dubbed “a dressed-up bet” – sponsors had the security of an insurance policy so were able to negotiate with teams additional payments if certain pre-determined results were forthcoming.
The “junior” F1 teams loved it and at the time some benefited – as did some drivers and indeed mechanics. The availability of this insurance dwindled when insurers ventured into football bonuses and accusations of match rigging led to some pretty messy claims. The market effectively closed itself down with only a handful of insurers remaining offering rather poultry sums insured thereafter. There was not enough cash on offer to excite teams and sponsors anymore. The insurance industry started to sneer at such insurance derivatives and like the FCA of today – completely overlooked the fact the customers were actually perfectly happy paying the premium to buy the cover they perceived was of some “value”. Never the less Contract Bonus Insurance was little more than a fad and was quietly side-lined – a bit like the F1 cost-cutting proposal of 2010 and was consigned to the shelf…
…But human nature being as it is… history repeats itself. New insurers have started emerging, wanting to explore and refine ideas of the past. €10m does not go far in F1 but it is great news to think insurers might be opening their doors to F1 again.
Think about it, a sponsor can say to a team, “we only have €1m to give you, but we are only going to pay €500,000 but we will pay you a performance bonus of €5m (for example) if you achieve x points/podiums”. The sponsor foots the bill for the premium – but there is now €5m in play that was not there before – courtesy of insurance.