The Insurer of State - in bullet points

Time pressed and want to understand without diving too deeply into the content? A lot of folks that hear about this concept realise it's a big idea - they can suspend their disbelief to consider it, but need quick bites.

So, here's the summary.

It Insures the Treasury/State

This is an "indemnifier of last resort".

Its mechanisms "insure" the State balance sheet and contingent (or explicit) liabilities - by using demand for insurance within the economy as an economic instrument. It steps in when the government is financing what the industry is (or was) unable or unwilling to cover losses that effect a large swathe of the economy.

It is for the big, bad, worst case scenarios. Like pandemic, natural disaster and systemic economic loss. This ability to make a "unilateral admission of liability" is known here as Autocession (because the IoS can "cede" whatever losses it wishes to its balance sheet.)

It does not sell policies to people or companies

Just as the Bank of England does not loan money to individuals, or allow people or companies to directly treat with it, neither will the Insurer of State operate like an insurer.

It won't sell insurance policies. Rather it participates in the market as its apex institution - adding a levy and override to "all risk transfer products" sold, to provide a baseline of liquidity for its various immediate responsibilities.

Instead, it represents the Government and State's insurer - using its tools outlined herein to indemnify the country's entire balance sheet. In practice, that may mean that some capital it creates is sent "downstream" through the insurance industry to policyholders; that is only likely to occur where the industry can act as an administration support and fraud checker.

In the blog on "Nudging" - we speak about the behavioural impact of making society's access to this second "sovereign capital creator" requisite upon holding an insurance product related to the loss(es) the Government and IoS deem the state liable.

Central Bank Clone - for Insurance only

It is a central bank/insurer hybrid only for the insurance sector- with a Governor and a remit to mitigate State Risk and make the economy more resilient to uninsurable and "insurance industry-breaking" risk.

It will not replace existing state partnerships - like Pool Re

The UK government already has made or backed interventions in the risk markets through bodies like Pool Re, Flood Re, the MIB and other compensation schemes.

The Insurer of State does not replace or supplant them - it merely acts as guarantor for them instead and on behalf of Treasury. This structure should at full tilt "buy the industry time" for the market to react to any black swan event. It will also create a scaffold for both the creation and ongoing governance of these "Re" vehicles that will always be needed from time to time.

Finally, it offers a technocratic pathway for the Treasury to better engage with an industry that has a number of relevant and complex stakeholder relationships.

World-first, requires Act of Parliament

It is created with an Act of Parliament, an historic event and the first of its kind in the Western World. - It sits atop insurance sector, not the banking sector. 

Takes over PRA and FCA (insurance responsibilities)

It overseas the regulation of Insurers and Insurance Intermediaries. This would also allow for a simplification of the insurance industry's regulatory complexity - as a single fee could replace four different price distortions (Insurance Premium Tax, FCA levy, FSCS levy, Ombudsman levy.)

State Insurance Premium replaces Insurance Premium Tax

Insurance Premium Tax would be culminated and replaced with a fee levied on all insurance (or itemised class by class) by the Insurer of State. This is called State Insurance Premium (SIP) and its quantum is decided by the Indemnity Policy Committee (a group if 12 economists and risk experts).

The FSCS, the Ombudsman levy and the FCA Levy would all be "rolled into" the SIP fee. SIP would not be offset-able with VAT - otherwise the model would be distorted. If it was, then the IoS would need to have rights over the respective size of VAT refunded to the industry.

It works like an insurer - but has capital creation superpowers

SIP is the regular revenue for the IoS - some of it is paid towards coupons of perpetuals (see below). The balance is invested in "Risk Management" projects and these budget expenses are taken over from various government departments.

Just as the Bank of England has no "central bank" above it, and is sovereign - in that it cannot, in theory, ever go bust - so it is for the Insurer of State.

Beyond its SIP income, it can create loans and that replaces its need to hold rigid capital reserves - like a normal insurer. This is because of the Loss Quadrant.

Can Create Capital like a Central Bank

It can operate a similar model to the Bank of England's Asset Purchase Facility => where Special Purpose Vehicles (simple companies created as needed) are made and loaned capital by the Insurer of State (for a nominal interest rate). These are called Loss Purpose Vehicles (LPVs).

They use the capital to buy new "Perpetuals" from a unit of the DMO attached to the IoS / the coupon is a slice of the State Insurance Premium (forever) and there is no secondary market, only the BOE can switch out Perpetuals out for Gilts. A bond, but not a bond.

The money used to buy the Perpetual equals indemnity for the State. The Insurer is effectively "loaning a subsidiary" money to "buy its parent's bond". The balance sheet is stable because the bonds can never reduce in face value.

Can Create Capital for Retrospective Issues

It can do so retrospectively on issues where the state has a "claim made" rather than loss incurred... eg/ Post Office compensation, Blood Scandal, Waspi. 

This would allow enquiries and all manner of other uses of the mechanism.

Perpetuals are like Synthetic Gilts - with no secondary market

Perpetuals are form of State Debt - but they are "synthetic" in the sense that they can 1) never reduce in value, 2) only ever be purchased by a Loss Purposes Vehicle (LPV) and 3) only ever be settled by the Bank of England to be on-sold as Gilts.

This prevents a Trussonomics-style market event if these instruments are used, because there is no risk the LPVs can become "technically insolvent" and fail to repay their loans to the IoS.

It could indemnify Treasury Immediately for QT losses.

Since the Bank of England has been selling bonds it purchased with "created capital" via the APF - the value of the bonds has led to a loss. That loss difference has been fully guaranteed (indemnified) by HM Treasury. This is a bill in the many billions.

The IoS could indemnify HMT for these guarantees - transferring the loss into Perpetuals, and unlocking massive fiscal headroom.

It works "in union" with the Bank of England and Treasury

It does not compete with the Bank of England, it can operate mutually exclusive to it and addition to all the monetary policy tools the BoE uses. The only similarity is the IoS' ability to create capital.

This institution creates an entire new arc of economic policy - herein called Indemnity Policy. An umbrella term for the various existing economic models and theories - reviewed in context of the advent of the Insurer of State.

Could immediately Unlock £400-600bn+

As soon as the balance sheet and instruments exist, they can be used to "pay claims" to the Treasury. This would allow all the costs of Covid, and other "state liabilities" incurred to be "refinanced". This could happen fast, or slow. It would depend on what the mechanisms were used for - consider further below.

A reasonable estimate by looking at Covid, Quantitative Tightening losses would be at least £400bn.

Becomes Parent to other State Insurance interventions

It overseas all the current state interventions (and provides unlimited "autocession" solvency reinsurance) - from FSCS Bank Deposit guarantees to compensation for civil commotion, through to Flood Re and Pool Re.

It would allow for much higher balances to be covered/guaranteed by the FSCS in UK Banks, for example.

Economy Needs Insurance - in order to access support

It closes the protection gap because any capital created/ sent "downstream" must have an insurance policy attached. This is a behavioural facet of the model - the market "wants" insurance because it means more. So a massive nation-wide cyber attack, for instance, would need cyber cover to allow the flow of autocession and capital through to indemnity.

Allows for "State Captive" cells

It would reinsure ALL state institutions (like the Fire Services, currently spending 1-2% of their budget on insurance). This represents a real and tangible risk transfer opportunity that can be spread (through the insurance buying economy) across the entire country - without being a tax.

Could Support Our NHS

It could reinsure NHS Trusts and take over all the compensation cover (leveraging PMI's SIP to fund cyclical changes or spikes.)

Responsible for National Risk Register

It operates the National Risk Register with Cabinet Office - this is the "radar" of risks the country faces. They interact with the Realistic Disaster Scenarios and solvency stress tests the PRA currently regulates and reviews. Allowing for LPVs to be "frameworked" with industry Before The Event - offering rapid mitigation, making the UK a very attractive investment destination.

Insurance Sector Unchanged

The insurance industry wouldn't need to change a thing. It would price, insure, reserve, reinsure - however it would be regulated by the IoS and interact with it.

Industry would either "settle" the State Insurance Premium to it; or "distribute" indemnity the IoS has "admitted liability" to pay to its policyholders. (Admin fee would apply in this instance to cover costs.)

Indemnifies, doesn't loan or grant

Indemnity isn't debt, not like the CBILs, it's indemnity, so it repairs economic capacity lost. 

Who's winning here?

This think tank concept is not-for-profit, this is not a startup that requires equity investment or fundraising. It is a policy-in-a-box designed for the betterment of British Society.