Greater cooperation between public and private sectors in this area would prove beneficial to both sides. Within the right parameters and with the necessary government support, it should be possible for insurance companies to invest sizable pots of capital in ways that would stimulate public infrastructure projects. There is certainly no shortage of potential investments: the HS2 high-speed rail link, social housing, road networks, and broadband access. We are arguably under-served in all these areas. Looking at our future needs as a sustainable and competitive economy, we might add social housing, water, aviation and energy networks to the list.
How to fund infrastructure projects is an issue presently taxing the country’s best public policy minds. A key obstacle is the long-term nature of such projects. Airports, for example, can take up to 15 years to build. Great uncertainty would surround that kind of investment and insurance companies, their shareholders and policyholders would need to be satisfied that the risk–return profile was appropriate. This is where government guarantees could lend a helping hand, and is certainly a discussion well worth having. If the government can step in to bail out our banks, then perhaps a more proactive participation in the insurance sector is also possible.
Banks are currently being criticised for underserving certain markets that are key to the growth of the UK economy. SMEs are one market segment still experiencing problems in obtaining affordable credit; another is the residential mortgage marketplace, although there may be the first signs already developing of another property bubble in some locations and sectors of the market. Should insurance companies step in? A small number already have, seeking to fill this gap and meet the need for credit in these two sectors. A widespread shift among insurers towards such a strategy would present operational, governance and regulatory challenges, but none of these should be insurmountable.
I believe there is another incentive. The reputation of the insurance sector could be enhanced through its public commitment to supporting infrastructure investment. Thus the sector could align itself with the long-term needs of the UK economy. There is an opportunity here for the sector to rebrand and reposition itself, and to work on projects that are broader in scope and address longer-term social needs.
Why hasn’t this happened already? The regulatory scrutiny currently experienced by the insurance sector demands greater solvency requirements. This is accompanied by increased supervision in the way insurance companies conduct business. Government involvement would be necessary to address these regulatory issues. Government could also consider how long-term investments in public infrastructure projects could be made to work without increasing the regulatory burden.
These activities would put insurance companies in a position to market themselves not only as providers of excellent products, but also as customer-friendly organisations contributing to broader social aims.
And this is part of a broader link between insurance and desirable social outcomes. Typically, these broader social aims, including personal pension and health care provision are longer term challenges and dealing with the long term is part of the DNA of some insurance companies. Thus, a virtuous circle of economic growth and beneficial social outcomes becomes closer.
It is not only capital that is being locked up due tothe current financial difficulties, but also management time and innovation. The attention of insurance company boardrooms needs to move away from survival to profitable growth and onwards towards innovation.
There is a significant backlog in infrastructure investment accompanied by slack growth, while our construction and technology industries have the capacity to grow and meet more demand. Inflation and interest rates are relatively low, so the time to act is now. Other economies, not just the UK, could do this now and global competition would help accelerate the process.