Newsletters

May 2016

May 2016

An Interview with our Chairman

An interview with our Chairman

Andy Chapman, CEO of The Exeter, and new Chair of AFM, offers his thoughts on the future of AFM and the sector: link

AFM Member News, May 2016

AFM Member News

There are contributions this month from CS Healthcare, PG Mutual, Benenden, Kingston Unity and Sheffield Mutual: link here.

Update from the Chief Executive, May 2016

Update from the Chief Executive

In our sector, the possibility of small mutuals working together, to create a shared platform, may be one obvious opportunity to leap-frog the traditional larger insurers, constrained by large legacy systems…

What’s On? May 2016

What's On? May 2016

A round-up on events from AFM and our partners… there's something for everyone! Read here

EU Audit Directive – Beware of the impact and plan for the change

EU Audit Directive – Beware of the impact and plan for the change

Alex Barnes of AFM Associate Moore Stephens assesses the impact of new audit regulations: link here.

March 2016

March 2016

Update from the Chief Executive

Update from the Chief Executive

An increasing number of AFM members are involved in healthcare- as medical insurers, providers of treatment, and to help fund optical and dental cover.  This was the traditional role of friendly societies before the NHS was borne, and its resurgence today is in part explained by the growing demands on the health system in the UK.

In 2015 the Chancellor increased the rate of Insurance Premium Tax, from 6% to 9.5%.  Treasury saw this as a tax on insurers, not their customers; a little like the bankers’ taxes we hear so much about- though in the case of insurance, not to penalise poor behavior or to curb excessive profits, but instead through opportunism.  It was the largest tax raising initiative in the Budget, and aimed firmly at those quasi-compulsory insurances, such as motor and home, which are also taxed in other European countries.

But instead of insurers suffering the cost, most motor and home insurers merely passed on the cost to their customers: in a market where you have to buy cover it is easy to do this.  But healthcare products are also subject to the tax, and of course are not compulsory in the UK; where the customer has the choice to simply cancel the policy, it is not so easy to pass on extra costs.  Health cash plan providers have been particularly badly hit by the increase in the IPT rate; where premium levels are low, and profit are surrendered in favour of charitable donations, it is very difficult to absorb extra costs at short notice.

These providers face a real struggle for survival, and with a number in AFM’s membership, we have written to the Chancellor, and to the All-Party Group for Mutuals, to highlight their plight, and to seek action.  A copy of both notes is attached as a separate article this month: we will continue to press the case after this month’s Budget.

We explore these themes further in this month’s articles: I hope you enjoy reading this month’s edition of Mutually Yours – 

Martin

If you have any comments, or would like to be added to the regular distribution for this newsletter, please contact [email protected]

Also in this edition:

• Round up of the latest member news
• The impact of the IPT increase on mutual healthcare
• Investment News: Top 10 investment ideas for 2016 from Mercer, and news from Vestra
• The EU referendum: how it might affect your investments

Please follow the separate links to these fascinating new articles, or visit the website.  

AFM structure and Board

The AFM Board met on 14 March, to review nominations for a new Board and committee structure, in light of changes to our membership on 1 January.

We received many nominations from members to serve on the AFM Board and its committees, in light of a refocused commitment to concentrate on the interests of smaller mutual and not-for-profit insurers.

The following individuals have been appointed by the outgoing Board to serve on the AFM Board:

In addition, the Board agreed a revised Committee structure, as per the chart below (further details of their responsibilities and membership will be provided on the AFM website soon):

The new structure will enable AFM to focus on a revised set of priorities, as set out in this table:

The changes to our operating structure are also reflected in a revised AFM constitution, which you can view on the AFM website: https://financialmutuals.org/about/constitution.

The constitution includes a new mission statement:

“We promote the concept of mutuality by helping our members identify with, remain committed to and contribute significantly to mutuality, through the promotion of best practice and a commitment to working together and in the interest of members, customers and other stakeholders.”

Many thanks to all the members and Associates that have contributed to the development of our revised business approach. 

AFM comments on the impact of a Brexit for UK mutuals

We were asked recently to provide a comment on the forthcoming referendum: AFM is an apolitical organisation, so the following comments do not express a stated position on whether the UK remains within or leaves the EU.

“Mutual insurers in the UK grew rapidly in the industrial revolution to serve local communities and trades, and they continue to work as part of those communities today.  Almost all the members of mutuals live in the UK, and mutuals employ all their staff here, pay their taxes here, and invest their assets predominantly in companies, government gilts and property in the UK.  

"Regardless of the result in the June referendum, with a focus solely on serving UK consumers, mutual insurers are unlikely to change a business model that has enabled them to grow more rapidly in recent years than the British insurance industry as a whole.  AFM research shows people trust mutuals more than PLCs, so during any uncertainty in the aftermath of the referendum mutuals could see a greater surge in business activity.

"If there is a decision to leave the EU, the most apparent impact on most mutuals will be the effect on the wider economy; for example, how it affects the investment climate, interest rates and general prosperity.  Regulation is another key issue: in recent years the majority of insurance regulation has emanated from Europe, particularly via Solvency 2, and this has coincided with a time of closer scrutiny and much higher compliance costs.  Much of the UK rulebook will need to be rewritten, though as the UK regulators have actively embraced European rules, and as issues such as consumer protection and effective stewardship are now universally accepted, it is unlikely that the tone of regulation would change significantly.

“More generally, the nature of mutuality is about people coming together to create shared solutions to common problems, and we expect to continue working with and learning from the experiences of other mutuals, both in the UK and abroad, whatever happens."

Solvency 2: Rating agency licenses

When, in 2017, insurers provide a detailed Solvency 2 return to the regulator each year (and for some quarterly), they will be expected to provide data on the ratings of relevant investments used in the SCR (Solvency Capital Requirement), to demonstrate that they understand the risks inherent in their investment portfolio.  Fund managers already purchase licenses from rating agencies, and in recent months EIOPA and PRA have reinforced the importance of this data, and rating agencies have duly explored how to configure their products for use by insurers.

AFM Associate member Investec recently hosted a meeting for AFM, to discuss with the three main rating agencies (Fitch, Moody’s and S&P) their position on licenses for ratings agency data.  A number of the members and actuaries also attended.

All three agencies confirmed that they expect the following licenses as a minimum under Solvency 2, where fund management is outsourced:

1.    The fund manager retains a license for the rating of their funds;

2.    The fund manager takes a license to allow them to redistribute this data to their insurance clients; and

3.    The insurer will require a license to present the ratings data as part of their regulatory return.

(In some cases, where the actuarial function is outsourced a license may also be required by the actuary, though each of the agencies accepted this might be done at zero cost as long as the use of the data was restricted.  This may also be the case for the external auditor, if they store data relating to investments on their systems.)

We explained the small scale of AFM members, and the very restricted use they would make of the ratings data, which other than for regulatory reporting has no commercial value.  

Having broadly conceded that the need for insurers to obtain a license would be unavoidable, we wanted to gauge to what extent we could negotiate a better deal for members, either to pay individually or collectively through AFM.   The agencies have responded very positively to this, and we anticipate providing attractive options for members to consider soon.

We have involved actuaries in the process too, and are waiting to hear from other fund managers what arrangements they have in place.  Members will need to take into account any costs passed on by their fund manager(s), how many licenses they require and from what date they need them.

I will cover this shortly in a more detailed note to members: hopefully members will recognise this as a valuable solution from AFM enabled by the more co-ordinated approach we can take under our revised working priorities.

New inquiry by the All-Party Parliamentary Group for Mutuals

The All Party Parliamentary Group for Mutuals provided some significant support to the sector in the last parliament, including its inquiry into mutual capital, which in turn helped shape the regulators response to Project Chrysalis, as well as the development of the Mutuals' Deferred Shares Act.

The new Chairman of the Group, Gareth Thomas MP, confirmed that in 2016 the group would undertake a new inquiry into “financial services and the contribution that mutuals could make to help build a robust and competitive economy”. 

The inquiry will look into what action is needed to increase corporate diversity in financial services, focusing on legislation, regulation and government policy.  It will consider the areas of policy that mutuals are best placed to help address, as well as any barriers to their success.  Evidence sessions are being planned for representatives of the mutual insurance sector, from building societies, and from Treasury and the regulators.

The resulting report should provide an effective basis by which to lobby for more active engagement between the government and the sector, and in recognising how mutuals can help solve key challenges facing society today.

Measuring the sector’s contribution to health and welfare savings

Every time a policyholder makes a claim on their healthcare or income protection policy, they benefit from knowing that this will help them no get back to work more quickly, more healthily and more financially robust that they would have been otherwise. The insurance will also help to reduce costs to the NHS or the welfare state, and improve their employer’s productivity.

These are a very tangible and very valuable set of benefits, and AFM has commenced a piece of work to better measure the savings that accrue, to the NHS, to DWP and to employers, via the mutual insurance sector.

As well as contributing some hard evidence to the APPG inquiry work highlighted above, it will also demonstrate the importance to society as a whole of encouraging people to take more responsibility for their finances, and for ensuring the workforce remains fit and healthy.

A number of members are providing helpful advice to this project, and we are very grateful that AFM Associate OAC is undertaken the detailed analysis.  To help identify the savings the sector provides to the NHS and DWP we will be contacting relevant members soon.  In the meantime, if you’d like more information please let me know.

Corporate governance

As we covered in the February “Governance News”, new requirements were introduced this year, to help ensure the report and accounts are more readable, and better help owners of firms understand the risks and viability of the company.

These changes are reflected in the Annotated Corporate Governance Code, as well as in enhanced auditor requirements.  Amongst the changes to the Code that were introduced in 2014 are the strengthening the content of the Strategic Report, to provide a clearer statement on the future viability of the organisation, the principal risks it faces and how the Board monitors those risks.

So far around a third of AFM members have completed the annual review exercise, and responses to those questions devoted to the revised elements of the Code indicate members have been able to adopt the enhanced reporting requirements effectively.  The deadline for reporting is 30 June, and we will look more closely at the results, and the quality of reporting, afterwards.

Other news in brief:

• This year’s budget will be held on 16 March: we will alert members to any relevant issues soon after.

• FCA’s long-awaited paper covering its thematic review of legacy life insurance products has now been published.  All life insurers will need to consider the findings carefully, and some of the good practice will also apply to non-life companies.  AFM will be responding with a range of activies.

• Flexible ISAs: the savings industry has put together a leaflet explaining the changes to the product, which AFM members are welcome to download or print off.

• ABI suggests UK is gold-plating Solvency 2 audit requirements: in a welcome echoing of AFM's position, a recent article shows broader concern on the disproportionate costs for small insurers and mutuals as a result of PRA’s decision to make audit of public disclosure documents mandatory: link (subscription service).

• ICMIF Chief Shaun Tarbuck contributed to a global summit on “Insurers investing in climate solutions” at the UN in New York.  This was a vital opportunity to explain how mutuals are leading insurer work on climate risk across the world: link.

• AFM has produced a draft statement providing guidance to members on competition law compliance, which members should consider when taking part in sector activity.

AFM Events

• Our annual NED conference takes place this year on 10 May in London.  The event is tailored to NEDs, though member staff are of course welcome.  The full agenda is being prepared for release shortly.
• We are planning a Solvency 2 post-implementation seminar with AFM Associate Moore Stephens, to be held at their London offices on 19 May.  Full details will be released soon, and the seminar will focus on regulatory and Pillar 3 reporting, and early experiences of the new regime.
• The AFM Tax Training Day will take place on 14 June, at the office of AFM Associate Deloitte in London.  These events are always well-attended, and provide a snapshot of topical tax issues.
• This year’s AFM conference and AGM will be held on 10^th and 11^th October, at the Holiday Inn, Stratford upon Avon.  Situated in central Stratford on the banks of the River Avon, the hotel will have completed a full refurbishment before our visit.

More details on how to book will follow over the coming weeks; in the meantime, if you have suggestions for content or would like to take part, please contact me.

As a reminder, last year’s eventtook place on Monday 12 October, at the Lancaster London hotel.  The event took the theme of “the future of mutual insurance” and a copy of the slides are available to view.

Associate members:

• A number of AFM Associates are holding events targeted at members.  Our thanks to them for supporting the sector: in particular to Investec, OAC and Quilter Cheviot who have all run or scheduled events in the first half of 2016.

Other trade body events:

• International mutuals trade body ICMIF, of which AFM is a member, is holding a special two-day event in York from 24 to 26 May, which is free for AFM members to attend.  The conference focus title is “Why Gen Y? Challenges and opportunities for mutuals”, with a plenary session on the first day and the chance to focus on the second day on a more specific topic in an ICMIF forum:

o   The Communications Leaders Forum – Gen Y marketing and communications

o   The Regulatory Issues Leaders Forum– Aligning the interests of policymakers/ politicians with those of regulators/ supervisors

o   The Leadership Development Forum – Leading in a Gen Y world

AFM member Benenden Healthcare is hosting the event, and AFM will be involved in one or more of the sessions.  Places are limited, and to book a place follow this link.

• AFM is always pleased to alert members to the forthcoming congress of the European mutuals trade body, AMICE.  This event will be held 1-3 June, in Ghent, Belgium, with a focus on “Mutual Values” and how they can help secure the future of the sector. 

More details are available on the AMICE website: http://www.amicegent2016.eu/?q=21.

• The second iNED forum for 2016 is an update from the Prudential Regulatory Authority, with senior speakers from the General Insurance division.  The event will be held on 4 April, at the Insurance Hall, London; you can find out more and reserve a place (there is a £40 charge) via the website: http://www.wci.org.uk/event/ined-forum-series-2016-pra-update-monday-4-april.

There’s more to AFM…

For more information on the work of AFM, visit our websites:

financialmutuals.org
for members and all professional contacts

www.funtosave.org                       
for the youngest children, their parents and teachers

www.savingsquad.org      
for 7 to 11 year olds, their parents and teachers

www.AFMgovernance.co.uk         
for corporate governance compliance

You can contact us by:

·      Phone: 01472 852800,

·      E-mail: [email protected], and 

·      In writing: 7 Castle Hill, Caistor, Lincolnshire, LN7 6QL. 

AFM member news

AFM member news

This month’s newsletter includes a range of stories from members, with news on PG Mutual’s sponsorship of table tennis’ National Championships, loyalty bonus paid to credit unions by CUNA Mutual, a new partnership by Benenden with the Lawn Tennis Association, and a new guide from Paycare on developing employee benefits.

PG Mutual to sponsor table tennis National Championships

PG Mutual, the specialist income protection provider, has been unveiled as title sponsor of the 2016 table tennis National Championships.

The St Albans-based company has invested in the event, which will be called the PG Mutual National Championships.

The latter stages of the event from March 18-20 will be televised live on ITV4, giving both the sport and PG Mutual national exposure.

Mike Perry, CEO of PG Mutual and an enthusiastic table tennis player, said: “We were looking for a sport which fits in with our ethos as a business.

“Our support for the National Championships shows what you can achieve through sport. From a recreational sport which you might pick up on holiday, with hard work, dedication and the right support, you can achieve and compete at the top level.

“We are very much dedicated to families and work hard to give them the right support when they need it, so it’s a very good fit for us.

“We see this as the beginning of a fruitful relationship with Table Tennis England.”

Sara Sutcliffe, Chief Executive of Table Tennis England, said: “We are delighted to welcome PG Mutual to the table tennis family and thank them for their commitment to and investment in our sport.

“With the England Leopards currently performing heroics at the World Championships and the PG Mutual National Championships to be televised live on ITV4, this is an exciting time for our sport.

“We very much look forward to working with PG Mutual in the months and years ahead.

“I would also like to thank our commercial partners at Female Sports Group for their hard work in securing not only TV coverage but also bringing a title sponsor to the table.”

Fraser Houlder, Female Sports Group Director, said: “We are proud to be working with Table Tennis England as their commercial partners as Sara and her team continue to grow the sport and raise its profile.

“Having secured ITV to broadcast the championships we are now delighted to have brought on board a title sponsor. Table Tennis is a family sport and has a huge participation and fanbase and in our discussions with PG Mutual we have found a company who can share this passion with supporting families. They see that table tennis is a sport on the up and they want to be a part of this.

“We see this as the start of a long-term partnership between PG Mutual and Table Tennis England.”

Loyalty bonus from CUNA Mutual

AFM member CUNA Mutual is once more paying a loyalty bonus to credit unions in the Guaranteed ABCUL Pool for Loan Protection and Life Savings insurance.

For the second year in a row, CUNA Mutual– the global credit union insurance provider – will pay a rebate equal to a full month’s premium for January 2016 to ABCUL member credit unions who offer Loan Protection and Life Savings insurance as part of the CUNA Mutual ABCUL Pool.

This second rebate means that credit unions in the ABCUL Pool will have shared a combined loyalty bonus worth almost £500,000 over the last 13 months. It will be paid to all participating ABCUL Pool Credit Unions at the beginning of March 2016.

The loyalty bonus is equivalent to an average rebate of 68% on credit unions’ ABCUL membership dues, and for a number of credit unions, the rebate is actually greater than the amount they pay for their annual ABCUL dues.

In other words, for many credit unions, the cost of ABCUL membership is almost covered by this exclusive member benefit alone – and in some cases, it’s more than covered.

Three years ago, ABCUL and CUNA Mutual worked on re-designing the Loan Protection and Life Savings programmes with three objectives in mind:

• To guarantee that ABCUL-member credit unions, regardless of size or situation, would be able to obtain affordable Loan Protection and Life Savings protection.
• Increase the simplicity of rates and benefits.
• Provide credit unions greater peace of mind by increasing the stability of premiums, ensuring they remain affordable over the long term.

When the Pool was launched, every ABCUL member credit union at that time was given the option of joining the Pool. For those that chose not to, it made commercial sense to remain individually rated.

By creating the Guaranteed Pool, ABCUL enables credit unions to benefit from spreading the risk and avoiding peaks and troughs of claims performance at an individual level. This creates stability of rates, and means all participants benefit from this pooling of resources.

The new programme has exceeded expectations on these objectives and – because it is offered by a mutual provider – the Pool’s good performance has seen these substantial loyalty rebates being paid to ABCUL-member credit unions.

ABCUL Chief Executive Mark Lyonette said: “We’re proud to work with CUNA Mutual to help credit unions affordably offer Loan Protection and Life Savings Insurance, and to give the peace of mind they provide to hundreds of thousands of credit union members and their families. Our credit unions are differentiating themselves by helping thousands of families each year deal with the financial burden associated with bereavement.

“The success of the ABCUL Pool – including this very substantial loyalty rebate – is testament to the benefits of co-operation, and this unique programme delivers exceptional, real value to our member credit unions.”

CUNA Mutual Europe Chief Executive Paul Walsh (pictured) said: “I’d like to express our thanks to all at ABCUL; to Mark, his team and the Board for working with us in making this a stronger and more sustainable protection programme that’s open to ABCUL credit unions, regardless of size.

“By creating a strong and robust pool of credit unions for Life Savings and Loan Protection by leveraging the scale of the combined ABCUL credit union group, CUNA Mutual have been able to provide all our credit unions with a fair, inclusive and sustainable benefits programme. This is strength through co-operation in practice.”

Loan Protection Insurance covers credit unions when a member dies with a loan outstanding, which means the debt dies with the debtor and the estate is not pursued.

Life Savings Insurance means that credit unions that offer this benefit pay a single lump sum to a member’s nominated beneficiary upon death, which is based on the value of the member’s shares (or savings) in the credit union, and can assist family members with additional funds to support end of life expenses at the very time they need some comfort, support and assistance.

149 ABCUL member credit unions are in the Pool and have these policies with CUNA Mutual to provide significant benefit and comfort to their members, and all those credit unions are eligible to benefit from the loyalty bonus.

Benenden launches new partnership with the Lawn Tennis Association

Benenden has joined up with Lawn Tennis Association (LTA) to run a series of Benenden Tennis Festivals across the country this year – with the aim to promote health, fitness and inspire more people to play in their local clubs and to change public perceptions about tennis.

Research launched on 3rd March by Benenden ahead of Team GB’s match in the Davis Cup by BNP Paribas has revealed that over one in five (20.4%) parents would like to play more tennis with their family and nearly 1 in 5 (15.6%) believe that there are more British role models in tennis than any other sport.

With sunnier, lighter days fast approaching you’d expect families to lace up their trainers and get out on to the tennis court, but perception barriers to taking part in tennis were also revealed in the survey with 20% of people thinking that tennis is an elitist sport and nearly a quarter (24%) believing tennis is too expensive to play.

The research also found that 88% of people agree that more needs to be done to make tennis more accessible, with data from the LTA stating that 70% agree that it is a great way to keep healthy. Benenden and the LTA have come together to positively address this issue by running a series of Benenden Tennis Festivals across the country this year, with special packs available free to GB tennis clubs containing everything they need to organise a festival with the aim of getting more people playing tennis more often.

Greg Rusedski, former British number one tennis player, said: “It’s interesting that the public still believes tennis is too expensive to take part in. It’s an oddly popular misconception when all you actually need is a racquet, ball, a friend, and public court which can be free to use. The Benenden Tennis Festivals organised by the LTA are designed to inspire more people to play tennis via clubs across the UK and to hopefully change the public perception that tennis is too elitist.”

Lawrence Christensen, Group Marketing Director at Benenden, said: “Promoting good health and wellbeing is at the heart of Benenden’s values and with 70% recognising tennis could be a great way to keep fit, the Benenden Tennis Festivals are a great solution to a perception that tennis isn’t as accessible as it could be. British success in tennis professionally is on the rise and we want to help the LTA to get more people playing tennis more often.”

Benenden and the LTA are hosting Benenden Tennis Festivals throughout the year right across the UK to coincide with key seasons in the tennis calendar. Over 380 tennis clubs signed up for the first festivals coinciding with this weekend’s Davis Cup by BNP Paribas match with the second series of sign-up for the grass court season beginning on 7th March. 

Paycare helps employers retain key assets with guide launch

The ‘How to Develop and Implement an Effective Employee Benefit Strategy’ guide provides a series of top tips on motivating, rewarding, and retaining staff, and we’ve made it available for you on our homepage www.paycare.org.

Retaining good employees is absolutely critical in ensuring the long term health and success of any business. Our company warns that Accutane from the https://summitps.org/accutane-isotretinoin/ requires strict medical control. The patient should take a general and biochemical blood test and go to the doctor to assess his general condition and laboratory data at least once a month. With absence costing UK industry an estimated £30billion a year and the recruitment of a new member of staff costing over £30,000, it’s more vital than ever before that employers do all they can to energise and engage their existing teams.

With job satisfaction and workplace happiness becoming increasingly more important to individuals than monetary rewards, employers are having to find alternative ways to ensure that their teams feel valued and motivated, and that in turn their overall wellbeing and productivity are enhanced. We are passionate about bringing real benefit and added value to companies across the UK, and are hugely excited to have launched a dedicated guide which outlines a variety of ways in which businesses can guarantee a happy and high-performing workforce!

The guide covers:

• Mental and Emotional Health
• Physical Health and Fitness
• Stress: The Number One Cause of Absenteeism
• Prevention and Early Intervention
• Employee Benefits vs. Costs of Absenteeism
• Employee Engagement and Involvement at Board Level
• Reviewing Your Benefits Strategy 

Budget 2016: Insurance Premium Tax threatens the support Mutual and Not-for-Profit Insurers can give to the NHS

Budget 2016: Insurance Premium Tax increase threatens support for the NHS

This note covers recent correspondence to the Chancellor, as well as a note to the All-Party Group for Mutuals on the impact of Insurance Premium Tax increases on mutual healthcare.

Rt Hon George Osborne MP
Chancellor of the Exchequer
 

29 February 2016

Dear Mr. Osborne,

Budget 2016: Insurance Premium Tax threatens the support Mutual and Not-for-Profit Insurers can give to the NHS

The Association of Financial Mutuals represents mutual insurers and friendly societies in the UK, who collectively manage the savings, pensions, protection and healthcare needs of over 30 million people in the UK, and employ 30,000 staff.  Treasury recognises the importance of maintaining a viable mutual sector in UK financial services, in part to improve competitiveness on behalf of the customer, and we value significantly the recent support we have enjoyed through work on the Mutuals’Deferred Shares Act.

I am writing ahead of this year’s Budget to highlight the impact that the recent increase in Insurance Premium Tax has had on our members providing healthcare products that compliment the services of the NHS.  The rise in IPT was the single largest revenue raising element of the last Budget, and the Association of British Insurers (ABI) has estimated that in total it has increased insurance bills by £100 a year for many households.

The Economic Secretary to the Treasury recently wrote to a constituency MP, in response to a letter raising concerns expressed by one of our members, Sovereign Health Care.  In her note, the Economic Secretary indicated that “IPT is a tax on insurers, not their customers”.  But ABI’s evidence demonstrates that insurers are passing on the extra cost, where possible, to their customers suggesting that the tax is not producing the desired effect.  This is particularly the case for quasi-compulsory insurances, such as motor or household cover, where it is easier to pass on higher costs to the consumer.

For non-for-profit and mutual insurers that offer healthcare products however, these extra costs are being largely borne by the insurer.  This is because demand for these products is not so elastic, and consumers and employers are resistant to price rises.  The not-for-profit nature of these providers means- as their name suggests- they are not well-placed to absorb this cost, so the recent increase in the tax has eroded their ability to continue to commit significant resources to community and charitable investments, as well as to threaten their future viability.

For health cash plans, the main benefits of the product are optical and dental treatment; in other words, they help people lead a healthy life, and as a result they do not conform to the traditional nature of insurance, which is designed to pay out in the event of a loss or illness.  These providers do though save the NHS £100s millions every year by early treatment and prevention.  So the threat to health cash plan providers via the imposition of IPT is also a threat of higher costs for the NHS. 

We support the ABI’s position, that any further increase in IPT will ‘hit millions of people trying to do the right thing’.  Whilst Treasury has stated that the UK rate of IPT is lower in the UK than in many countries, this is largely not the case – most countries in the EU do not impose IPT.  Hence, as well as suggesting a freeze in the rate for quasi-compulsory products, we ask that health cash plans in particular are exempted from the tax altogether.  This can be achieved either by an exemption, or by reclassification of the product as non-insurance. 

I very much hope that the Government feels able to support our sector, and we would be delighted to develop these, and other, ideas further with Treasury colleagues.

Yours sincerely,

Martin Shaw

Chief Executive

cc Harriet Baldwin MP, Economic Secretary to the Treasury

Impact of the increase in Insurance Premium Tax on Health Cash Plans

Prepared by AFM for Gareth Thomas MP, Chair of the All Party Political Group for Mutuals

During the APPG for Mutuals meeting on 15 December, the chairman asked AFM to prepare a background note to highlight the impact of the increase in Insurance Premium Tax on Health Cash Plans.

The NHS is a key political issue today and will remain so for the future, with the costs of providing a comprehensive, world class service ever increasing.  As insurers know all too well, whilst life expectancy has increased dramatically in recent decades, so too has the prevalence of illness, meaning that the cost of delivering healthcare is escalating at a dizzying pace.  And of course when people are of work ill, the cost of welfare also increases and productivity falls.

Insurers provide an important role in helping to bridge the affordability gap, by taking some of the pressure off the state.  A wide range of AFM members are involved in providing income protection policies to replace wages when someone is off work sick, or medical insurance to provide early treatment, or health cash plans, to pay for dental and optical care and a wide range of ailments.  This is very consistent with the role that mutuals performed in the days before the Welfare State and the NHS.

Healthcare products provided by mutuals save the NHS many £ millions every year, by funding treatment.  They also have an increasingly important role in rehabilitation that gets people back to work sooner, and in education and other aspects of living more healthily.

During the July Budget, the Chancellor raised the cost of Insurance Premium Tax by 58% (from 6% to 9.5%).  The main focus was on home and vehicle cover and other quasi-compulsory insurances where insurers have readily passed on the higher costs to customers.

But there has been a significant consequence on mutuals, and in particular health cash plan providers.  These policies generally have very low prices: often starting at a pound or two a week.  They can be purchased by individuals to help manage healthcare costs, but they are also popular with small businesses where they are seen as a very valuable way of providing support to the workforce and in improving morale and staff retention. 

Martin Lewis’s Moneysavingexpert website states that “used correctly healthcare cash plans allow you to recover these costs and can pay you back up to six times what you spend on them each year”.  Health cash plan providers are specifically established on a not-for-profit basis, and their profits are ploughed back into the communities they serve via significant charitable donations.

All this does mean that it is a very cost sensitive product, and demand from consumers is price inelastic.  So these small providers have found themselves having to foot large bills for extra tax: they are reluctant to pass the costs onto policyholders and small businesses, and therefore they face a real threat to their survival and to the charitable donations that are such a significant feature of the market. 

The sector itself predicts that the total tax take from cash plans will reduce as a result of the higher rate, both because volumes of sales will fall but also because companies that buy these products will shield remaining policies via trusts.

Possible solutions

1. We’ve seen some local MPs write to the chancellor already suggesting health cash plans should be exempted from IPT; some competitor products are exempt and have a real price advantage now. 

2.  An alternative solution would be to reclassify the product, so that it is no longer treated as a medical insurance policy: which in the traditional sense of insurance a health cash plan is not, as you do not have to be ill to claim (you might merely have been to the dentists or opticians for a check up to receive a payment).

Impact

As we suggest above, the impact of removing health cash plans for IPT is likely to be cost neutral for the exchequer.

But for consumers and small businesses the benefits of making the product more competitive is that many more people will take action to manage their future health needs better, relieving many £millions of cost from the NHS and from welfare benefits.  Equally, these changes will secure the large contributions made by the sector to charities.

AFM is undertaking further work to demonstrate the healthcare savings provided by the sector.

Action

It would be very helpful to our case if members of the All Party Political Group for Mutuals were able to contact the Chancellor to ask him to review the decision to impose Insurance Premium Tax on health cash plans.

For more information, please contact Martin Shaw, Chief Executive, Association of Financial Mutuals ([email protected]; 0788 754 7195)

About AFM

The Association of Financial Mutuals (AFM) represents insurance and healthcare providers that are owned by their customers, or to serve a defined community (on a not for profit basis).  Between them, mutual insurers manage the savings, pensions, protection and healthcare needs of over 30 million people in the UK and Ireland, collect annual premium income of £16.4 billion, and employ nearly 30,000 staff[1]. 

The nature of their ownership and the consequently lower prices, higher returns or better service that typically results, make mutuals accessible and attractive to consumers, and have been recognised by Parliament as worthy of continued support and promotion.  In particular, FCA and PRA are required to analyse whether new rules impose any significantly different consequences for mutual businesses.

Investment News: Top 10 Investment Ideas in 2016 from Mercer, and news from Vestra

The UK Referendum on Membership of the European Union – How It Might Affect Your Investments

The UK Referendum on Membership of the European Union – How It Might Affect Your Investments

For the third time in as many years we are faced with a vote that portends disruptive change to the UK political and economic landscape. Following the Scottish referendum and the general election, both of which reached outcomes that were deemed to be market-friendly, the UK population now has to decide whether or not to remain in the European Union. As on the previous occasions, opinions polls suggest that the result hangs in the balance, promising a period of uncertainty ahead. However, the ramifications of leaving the EU appear to be a lot greater than any of the potential outcomes in the last two polls, meaning that volatility could be far greater this time, especially as the result will be binary.

One of the few things that we know with any certainty is the date, Thursday 23rd June. That leaves plenty of time for the opposing sides to lay out their arguments but, with many column inches and screen hours to fill, it also increases the risk that the media’s attention will be focused as much on the political pantomime as on the issues involved. For example, once the vote was announced, the opening of divisions within the government, especially in the case of Boris Johnson, garnered the majority of headlines. As investors we must be careful not to be distracted from the main event.

It is not our intention to take sides. Political affiliations tend to sit badly with investment decisions as judgement can become clouded by emotion. On the basis that a vote to remain within the EU would leave things looking much as they are, our principal aim is to assess the effect that Brexit would have and how we could position portfolios for that eventuality. In the interests of allowing as much space as possible for the investment discussion, we must assume that interested readers will already be well informed on the agreement that the Prime Minister has reached with his European counterparts on reforms.

By its very nature the debate will be emotional and contentious. Unlike in the case of a general election there will not be a chance to try again in five years’ time. This means that both sides will exaggerate the pitfalls and benefits in an effort to win the day. Understandable as this is, it risks confusing the electorate. A study undertaken by Capital Economics of various surveys into the effects of Brexit on the economy showed, over an unspecified forecast horizon, that there was a gap of 22% of Gross Domestic Product (GDP) between the most extreme views. Bearing in mind such uncertainty and the difficulty that even professional investors will have making sense of such information, it seems only natural that market participants will demand a higher risk premium until the outcome becomes clearer. That would suggest some underperformance of UK assets relative to overseas assets, although this would be limited by valuations being “anchored” to some degree to international averages.

One further thing to make clear is that a vote to leave will only be the start of a period of negotiation on the terms of exit which could take a minimum of two years to complete. This would particularly involve new trade agreements, not only with the EU, but also with other trading partners, the latter of which could take several years to complete. We also have to be mindful of the risk that Britain’s departure from the EU will encourage other separatist movements, for example in Scotland and Catalonia, which would have the potential to create further disruption. It might also give support to more isolationist parties in France and Germany, which both face national elections in 2017. The uncertainty will only end if voters choose to stay.

Asset Class Effects

Currency: The main victim in the run up to both the Scottish referendum and the general election was the pound, and this is happening again. There are good reasons for this to be the case. First of all it is a transparent and liquid vehicle to trade in with relatively low costs, therefore a favourite with speculators. More fundamentally, any material disruption to the UK economy and international trade would be distinctly negative for sterling. The UK continues to run a current account deficit of around 4% of GDP, and the money that flows out of the country to buy foreign goods and services needs to be replaced. If, as now, there are insufficient trade flows, the shortfall can be made up by Foreign Direct Investment (in corporate or infrastructure assets, for example) or capital flows (into investment assets, ranging from bonds and shares to property). These investment flows rely on a combination of perceived good value and confidence. If external investors are unsure on both counts owing to limited visibility on, for example, trade agreements, then they are likely to sit on their hands. It is also distinctly possible that UK-based investors look to hedge their risks by taking money out of the country, adding to the pressure.

We do not make currency forecasts, nor do we normally take strong views on currencies in our asset allocation process, believing that they tend to revert to the mean over our preferred longer term investment horizon. However, several high-profile investment banks have suggested that the pound could lose between 10 and 15% of its value in the event of Brexit based on experience during the financial crisis of 2008. That seems too high a risk to ignore. However a full blown crisis is unlikely to be on the cards. The fiscal position is improving and the country is solvent. There is also a self-correcting mechanism built into a falling pound in that the trade balance will improve and income from overseas assets will also be boosted in sterling terms. On balance, though, the pound will continue to trade weaker in our opinion.

Bonds: The main factor in favour of UK government bonds is that whatever the result it will still be the same government in charge, meaning a perceived safe hand on the tiller and a commitment to balancing the budget. Assuming for now that bond investors will continue to have no issues with the UK’s solvency despite the potential for lower tax receipts in the event of Brexit-driven economic weakness, it is the outlook for interest rates and inflation that will have the most profound effect on gilts. The UK is a very open economy and somewhat prone to bouts of inflation, especially in response to a weak pound, which, as we outline above, is a key risk. Long-dated bonds have been massive beneficiaries of the disinflationary global environment, but yields could rise in the face of higher inflation, exposing investors to capital losses with limited income to make up that loss. On the other hand, though, if the economy was undermined by a lack of confidence and lower incoming investment, would the Bank of England be forced to stay its hand on raising interest rates to boost growth? Given that deflation is currently perceived in economic circles to be the greater existential threat, it is possible that rates would remain relatively low with the yield curve steepening.

On balance there seems to be no strong argument to stray far from our current weightings. As we have reiterated on several occasions in the past, sovereign bonds constitute a key “insurance” element of client portfolios and will continue to protect us from unexpected negative developments, as they have done in early 2016. Any uncertainty about the economy may only serve to widen credit spreads in the sterling Investment Grade bond sector, potentially opening up better buying opportunities.

Equities: Large UK companies have recently been battered by influences well beyond these shores. Resource companies have been badly affected by collapsing commodity prices, exporters to emerging markets by the slowdown in China, for example. The fortunes of such large companies will not be materially affected by domestic events. Indeed, a weaker pound would bolster profits by making our exports more attractive and flattering the translation of earnings booked overseas. Dividends declared in dollars would enhance yields to sterling investors. With some three quarters of FTSE 100 revenues and earnings derived overseas, large cap equities provide something of a natural hedge against domestic uncertainty. Reflecting this opinion, we remain overweight in the defensive Healthcare and Tobacco sectors and also Media, although continue to believe that the commodity cycle makes Resource sectors less attractive despite their near 100% non-UK exposure.

More domestically exposed sectors and smaller companies will remain under greater pressure as concerns rise about weak demand, higher input costs as a result of the lower pound, and a wage-driven margin squeeze if access to cheaper labour from Europe is cut off. The biggest potential loser is the Banking sector, which is under pressure from several angles. Weaker activity in the UK would be poor for growth, but of greater concern is the threat of loss of access to European markets, something which is currently permitted via “passporting” rights. Although nothing is certain, it is probable that banks would have to apply for new licences to operate on the Continent, which would reduce the attraction for international banks to base their European operations in London. HSBC, for example, has said it might relocate 1,000 staff. Any reduction in banking activity would have severe knock- on effects for London – both the economy and the real estate market. We are currently Underweight Banks.

There are some smaller sub-sectors that might benefit from Brexit. Travel & Leisure companies with greater exposure to the UK would see more in-bound tourism with overseas travellers attracted by a cheaper pound. UK holidaymakers would also be more inclined to stay at home. Testing companies could prosper if the UK abandons the current EU accreditation system and reintroduces a separate British standard. Please contact your IW&I representative for more specific details.

Conclusions

It should be apparent from these comments that there are no easy conclusions to be reached, although we might feel more relaxed about the risks if the economy were booming and the world experiencing strong demand. Moreover, for all the arguments that might be made, voters will approach the referendum with their own peculiar biases. Some will focus on the economy, others on the judicial system. In current polls the most pressing concern of the majority of those interviewed is immigration. It seems probable that markets will be influenced by the polls in the run up to the vote, despite pollsters being discredited at the general election, although it’s fair to say that it’s much easier to call a two horse race. Having said that, there is already some bias emerging in the polls, with internet respondents – tending to be a self-selecting group – more in favour of leaving and telephone respondents – a more random selection – more in favour of staying. It has even been suggested that weather and exam timetables will play a part, as older voters with a greater propensity to vote to leave Europe might stay at home if it is raining, while students, who are more in favour of staying, might be distracted by academic requirements. On such vagaries could the UK’s future depend. Our optimal stance now is to continue to focus on high quality investments in a sensibly diversified portfolio with some tilts to reflect stocks or sectors where we see asymmetric risks, and the inclusion of overseas assets to hedge currency risk. It is probable that more opportunities will arise as the campaign unfolds and nerves start to fray.

Investec Wealth & Investment Limited is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange and the Investec Group. The information in this document is for private circulation and is believed to be correct but cannot be guaranteed. Opinions, interpretations and conclusions represent our judgment as of this date and are subject to change. The value of investments and the income derived from them may fall as well as rise. Past performance is not necessarily a guide to future performance. Investec Wealth & Investment Management Limited is registered in England. Registered No. 2122340. Registered Office: 2 Gresham Street. London. EC2V 7QP.