13 August 2014

Toys out of the pram at Legal & General

James Daley

By James Daley LinkedIn

Legal & General's decision to quit the Association of British Insurers is selfish and likely to be a decision it will come to regret

In what can only be described as a toys out of the pram moment, Legal & General today resigned its membership from the Association of British Insurers. This is not a story that's about to knock the suicide of Robin Williams off the front pages. But in the world of insurance it's important news - and it could potentially have ramifications that affect consumers as well as businesses.

If there were ever a time that insurance companies need to work together, it's now. Politicians and regulators have been attacking the industry from every side over the past couple of years - and while each of these investigations and regulatory interventions have been important and arguably necessary, it's hard not to have just a little sympathy with the insurers given that many of the most seismic changes have arrived with little or no notice.

While L&G's resignation letter to the ABI director general, Otto Thoresen, appears to be measured and entirely reasonable - it disguises the anger and frustration that have driven its move.

A churlish move

L&G is one of the biggest players in the annuity market, and its world was turned upside down when George Osborne announced in his March Budget that people would no longer need to buy an annuity when they retire. Presumably there have been some heated debates in the aftermath. My guess would be that L&G's response was firstly to criticise its trade body for not having good enough relations with government to at least get some warning of the ambush. After that, it moved on to criticising the ABI for not mounting a response quick enough.

While both of these may be fair criticisms - it's churlish for L&G to walk away. Trade bodies are a bit like unions. If your union manages to negotiate a pay rise, you still get one, even if you're not a member of the union. And L&G knows that if it plows the seven figure sum, which it currently pays to the ABI, into its own lobbying efforts, it will still benefit from any concessions that the trade body wins - as well as any additional prizes from its own efforts.

But the impact will be to raise the cost for each of its competitors, and to weaken the hand of the ABI - which now very publicly won't have the support of one of the country's leading insurance companies.

Trade bodies are useful

From a consumer perspective, you might be wondering why any of this matters. It's true that some trade bodies - notably the British Bankers Association while it was headed by Angela Knight - seem to be run only to protect the interests of their members.

But good trade bodies do help provide good outcomes for customers, just as they do for their members. In a world where policy and regulation is made on the hoof, a team of industry experts can play a really important role in helping make sure that new rules are fair - and they can also expedite the thinking that needs to happen as new policy emerges.

They do also occasionally instigate positive change themselves - creating codes of conduct and encouraging their members to sign up and raise standards. Without trade bodies, regulation would be worse and would take longer. And in the world of insurance, like it or not, regulation is a fact of life.

I'm sure the ABI will survive. But only by convincing the rest of its members to step up and fill the significant financial hole left by L&G. Finding information about the ABI's financial position is next to impossible. As an unincorporated body, it doesn't have to publish its accounts, and it won't disclose how much it charges members. What has come out over the years, however, is that it is tied into a very expensive lease on its headquarters in Gresham Street, and it also has a pension scheme that is proving very expensive (apparently trade policy policy wonks live longer than even the ABI expected).

L&G's move to turn its back on its colleagues makes it look like a company that is cavalier and prone to mood swings. It certainly wouldn't encourage me to put my business with them, and I think it may well be a decision it comes to regret.