Sky Views: Why insurers are displacing the banks

By Ian King, Paste BN Business Presenter

Many of us will, at some point during the next few days, watch It's A Wonderful Life. Arguably the greatest Christmas film of all time, it concerns George Bailey, played by James Stewart.

A small-town banker whose institution is in trouble, he is contemplating suicide when a guardian angel shows him examples of how people's lives would have been worse, had he not lived. George reconsiders, his institution is saved by the townsfolk and the film ends happily.

It's A Wonderful Life also features a villainous banker in Henry Potter, played by Lionel Barrymore, a character so evil the FBI suspected a Communist plot to discredit bankers and, by extension, capitalists. Yet it is George, the heroic banker, who most people remember and love about the film.

After the financial crisis there was a yearning for old-fashioned lenders like George...who understood their local communities and who knew their depositors and borrowers personally.

After the financial crisis, there was much debate about the fate of those traditional bankers, like George, who engaged in the simple business of taking deposits and lending money. There was a desire for bankers to stop trading on their own accounts or trying to sell exotic financial instruments to customers for whom they were ill-suited. There was a yearning for old-fashioned lenders like George or another fictional banker, Captain Mainwaring from Dad's Army, who understood their local communities and who knew their depositors and borrowers personally.

Britain's banks have got that message. All the big commercial banks now carry on their websites mission statements discussing their social purpose and how they are helping first-time buyers, small businesses, farmers, charities and other deserving customers. They are trying to make amends for past misdemeanours, such as compensating those who were mis-sold products like payment protection insurance or interest rate swaps, albeit not quickly enough for some.

But in a dynamic capitalist economy, when a gap opens in the market, someone moves to fill it. That has certainly happened in what might be called traditional bank lending. While there has been much commentary about the rise of alternative lenders, notably the 'peer-to-peer' sector, perhaps the most striking example is how the insurance sector has moved into activities once dominated by banks.

This was partly from necessity. Near-zero interest rates and asset purchases (quantitative easing) by the likes of the Bank of England, the US Federal Reserve, the European Central Bank and the Bank of Japan have pushed down bond yields to very low or even negative levels. That has hampered the ability of insurers - both life and general - to achieve the kind of financial returns needed to meet the claims of their policyholders and obliged them to consider other types of investment.

The logical alternative for many would have been equities but after the torrid experience of the early 2000s, when life companies like Standard Life were scarred by the bursting of the dot-com bubble, few wanted to go down that route aggressively.

So insurers are moving into other areas, such as investing in infrastructure. Examples include Legal & General, which on Thursday announced a £65m investment into a new science and technology hub in Newcastle, in partnership with the city council and Newcastle University. L&G has committed to investing £15bn in infrastructure during the next decade, including housebuilding and urban regeneration, while recent investments include a new distribution centre for Amazon.

Aviva, which has committed to invest £10bn in infrastructure projects during the next five years, is another moving aggressively into the field. Germany's Allianz, whose UK infrastructure investments include a military facility for the Parachute Regiment and London's new 'super-sewer', is a third.

For life companies, which must match long-term liabilities (in the form of pension payouts), having long-term assets like infrastructure projects, where the return on investment comes in decades rather than in years, it's a logical development.

The insurers will not displace the traditional banks overnight. Solvency II, an EU directive harmonising insurance regulation, places heavy restrictions on the ability of insurers to operate like this by insisting they put aside large slugs of capital to cover the possibility of investments going wrong.

But insurance, a sector traditionally viewed by many in the City as more cautious and less glamorous than banking, is thinking ambitiously. It's an exciting development and one from which Britain should benefit.

Sky Views is a series of comment pieces by Paste BN editors and correspondents, published every morning.

Previously on Sky Views: Hannah Thomas-Peter - Trump's terror comments exploit fears