Insurance Post

The year of living dangerously


2007 was undeniably a torrid year for the industry, with flood waters dominating the streets and fields of the country, as well as the minds and balance sheets of insurers. Jamie Dunkley looks back at an action packed year

It is no exaggeration to say that 2007 will remain imprinted on the memories of UK insurers for many years to come. Whether they have been dealing with the devastation caused by the summer floods, watching the drama of the Independent trial unfold or coping with a prolonged soft market, it's likely that people throughout the insurance industry will breathe a huge sigh of relief come the stoke of midnight on New Year's Eve.

Quite simply, it's proved to be a "torrid time for insurers", says Tony Hulse, head of the general insurance practice at KPMG.

David Parker, head of distribution at NIG, agrees: "This year will prove to be a pivotal one for insurers. Prolonged soft market conditions, the convergence of bad insurer results, consolidation, flooding, brokers setting up managing general agents. There have been plenty of reasons to make insurance companies reconsider their options and infrastructure."

The summer of 2007 will almost certainly be remembered for one thing - flooding. Indeed, in June one month's worth of rain fell in a single day in areas across the north of England and Severn Valley, leaving 27,000 homes damaged, alongside 5000 commercial properties and thousands of lives in turmoil. This was followed by a further downpours a few weeks later, which left areas of Gloucestershire submerged in water.

Estimates from the Association of British Insurers suggest that the floods cost the insurance industry £3bn and the suffering felt by many insurers became clearer as the year went on. As recently as November, Allianz revealed that the adverse weather conditions had cost it £83m, while others are still counting much larger losses.

Caught in a storm

Allianz chief executive officer Andrew Torrence said: "Our financial performance in the second half of the year has been negatively influenced by the losses caused by weather claims.

"Without the impact of this year's storms and floods, our level of profit level would have comfortably exceeded our performance in the same period last year. While such a hit to our profits is obviously unwelcome, as an insurance company you have to accept that adverse weather events will occur from time to time."

Many other insurers were affected, including Aviva, which had its reinsurance strategy questioned by Shore Capital analyst Eamonn Flanagan. He said the insurer's reinsurance rates had been set too high, costing it millions of pounds. Indeed, the first wave of floods alone cost the company £175m, with its reinsurance rates set at £310m. In comparison, Royal and Sun Alliance registered a £55m loss net of reinsurance with its excess levels at £75m.

"There was lots of talk about what an unprecedented event this was, but I'm not so convinced," said Alan Gairns, technical manager for first party property at Royal and Sun Alliance: "Scientific evidence suggests we'll see more of this too with warmer climates, denser clouds and intense rainfall striking the country."

Many local authorities in the UK faced multi-million pound repair bills after choosing to self-insure against flood risk damage.Kingston-upon-Hull City Council was among those affected and found itself facing huge costs without commercial cover.

The government had already indicated it would earmark £800m to spend on flood defences per annum by 2010, and despite the increased publicity with the floods and pressure from the industry it stuck to this figure in its Comprehensive Spending Review later in the year. Unsurprisingly, the ABI led calls for the government to bring this forward.

"The government has completely failed to grasp the importance of improving Britain's flood defences in the wake of the devastating floods across the UK," argued ABI director general, Stephen Haddrill. "The figure being offered is less than we were asking for, even before the floods. It does not begin to address the major issues, including drainage, which were highlighted this summer."

No sooner had the flood waters settled than the media was full of stories claiming that rates would be increasing. Allianz for one made a commitment to increase its commercial rates by about 5% at the beginning of 2008, although analysts say rate increases have proved to be far more theoretical than a reality. "Everybody claims that rates are going up but I'm just not seeing it," adds Mr Hulse. "The opportunity that the floods presented has not been taken. It was a good excuse to increase them."

Paul Delbridge, a partner at Pricewaterhouse Coopers, supports this: "The floods could have been a catalyst for change, but insurers don't seem to have taken the opportunity. Motor rates have increased ahead of claims inflation, but household rates have been pretty flat over the past few years.

Pressure cooker

"I think insurers face significant pressures though, as was seen last year when Norwich Union increased premiums and found they were losing volume as the rest of the market did not respond. Aggregators obviously place pressure on insurers too and their presence in the market places a huge emphasis on price."

Like Mr Delbridge, Derek Plummer, commercial director of MMA Insurance, agrees that the "battle lines" have been drawn in the private car market.

He adds: "Our intelligence tells us that the market put up rates by about 7%, while at MMA we put them up by about 11%. The big question is, will it continue? The private car market is beginning to harden up; it will be interesting to see whether we see a hardening of property rates too."

In the sports world Thierry Henry announced he was leaving Arsenal to join the Spanish giants Barcelona, and this year the insurance industry boasted its own high-profile transfer news.

In May, broker Willis announced it had signed Royal and Sun Alliance's managing director, broker division, Brendan McManus, to become chief executive of Willis UK and Ireland. He was recruited - in part - to push the broker's retail small to medium-sized enterprise business.

This was followed by the shock departure of Norwich Union executive chairman Patrick Snowball to Towergate. Speaking to the Norwich Evening News about losing out to group finance director Andrew Moss in his bid to succeed Richard Harvey as chief executive of Aviva, Mr Snowball was quoted as saying: "I was disappointed not to get the senior role at Aviva. I can understand the decision of the board in terms of age and so on."

This year also saw the further development of a strong trend of insurers buying brokers. Most prominent in this area were French insurers Groupama and especially Axa.

Sale of the century

Axa began the year with the acquisitions of commercial brokers Layton Blackham and Stuart Alexander in January in a £58.5m deal, igniting a succession of broker sales to insurers. Both firms chief executives, Chris Blackham and Stuart Reid, became joint CEOs of the new firm. The deal was done through Axa subsidiary Venture Preference, which already owned 38.9% of Layton Blackham. This was followed by the acquisitions of Swiftcover from Primary in February and Smart and Cook in April, where boss Paul Meehan also became a joint CEO of VP.

Groupama followed its 2006 acquisition of Carole Nash with a 60% stake in Bollington in June and Lloyd's broker Lark in September. However, it insisted that it would not be copying the "Axa model" but would be keeping them as separate organisations.

In comparison, Norwich Union announced that it would be setting aside millions to establish its own 'bank' to help independent brokers stave off the interest of the likes of Axa and Groupama. Chief executive Igal Mayer poured scorn on assurances from the likes of Axa chief executive Peter Hubbard that insurer-owned brokers will retain their independence.

Reflecting on his own experiences in Canada, where he claims Axa bought brokers in Quebec and, ultimately, turned them into tied agents, Mr Mayer said the market would be "naive" not to think this would happen again. Instead, he has revealed that NU intends to set aside significant funds to help brokers retain their independence and control over business decisions, such as succession planning and making acquisitions, as well as assisting start-ups.

Phil Bayles, director of trading at Norwich Union, said: "Towergate's acquisition of the Broker Network and Open GI, VP backing the Layton Blackham network and Jelf launching Purple Partnerships are transactions that have happened this year, but for the independent broker it's '"Where do I go now? Where's a safe haven?' Some networks have remained independent, such as Cobra, and as far as we are concerned, we've launched 110, an initiative for mid-market brokers to help them stay independent and compete in the market.

"We've also seen a trend towards brokers wanting to set up underwriting agencies so that they can market their own range of products, carry out operational functions and undertake claims handling, yet there is not always an appreciation of the risks and responsibilities that come with the model."

In other news, in October six years of legal proceedings came to an end when three former directors of Independent Insurance were found guilty of conspiracy to defraud. Former chairman and managing director Michael Bright was sentenced to seven years for fraudulent trading at Southwark Crown Court, former finance director Dennis Lomas, who was also found guilty of two counts of conspiracy to defraud, was sentenced to four years, and deputy managing director Philip Condon, who was guilty of one charge, three years. All three were banned from being directors of companies for between 10 and 12 years. Labour MP Barry Gardiner led the cheers, telling Post the verdict was "one up for British justice".

Justice is done

"I'm just pleased to see that the system works," says Mike Williams, UKGI managing director. "There are lots of cynical people throughout the insurance industry who question whether the serious fraud office actually fulfils its purpose and this shows something right is happening."

Unsurprisingly, some insurers reacted to these telling market conditions with a host of reorganisations and redundancies. In July, Axa confirmed plans to close five regional offices by 30 September, saying that it expected to cut up to 200 jobs by the end of the year. This was followed by Allianz, which revealed plans to consolidate its claims division and close its centres in Leeds and Glasgow affecting 37 staff.

In August, Royal and Sun Alliance announced it would cut 700 jobs globally as part of a move to drive another £70m in savings by mid-2008.

In terms of company reorganisations, Norwich Union was forced to pledge its support to the intermediary market last month, following an internal announcement that it had axed almost a third of its directors. It removed any reference to brokers and intermediaries in its director's job titles but claimed they remained a "vitally important part of NU".

Elsewhere, Royal Bank of Scotland Insurance announced a restructure that saw two more directors leave the company and former NIG managing director Charles Crawford give up the broking part of his role. The insurer did, however, insist that the move was not a precursor to the group selling NIG, which had been linked with AIG.

So what are the predictions for next year? "The storms this year obviously had a huge effect, but the speed of change in distribution has been notable throughout the market," says Barry Smith, chief executive of Fortis.

"The increased market presence of aggregators and change in broker relationships has particularly stood out. 2007 has been a notable year, but we're looking forward to 2008 with great enthusiasm."

Running the gauntlet

Mr Williams believes the challenges for insurers could continue into the next year: "The evidence for insurers gearing up for a hardening in markets is patchy to say the least. Apart from fleet, there really is no other class of business where this is happening. Even the personal injury market remains cutthroat and what insurers are telling me is that it could even be 2009 and beyond before things start to toughen up. There is no doubt that the product providers would like to see a general hardening of the market but they appear to be very pessimistic about the chances of this happening any time soon.

"As for what the market is bracing itself for next year, all eyes will be on Towergate as usual. Are they going to be bought or get a venture capital investment or just carry on? With the audacious acquisitions of Open GI and Broker Network, you would not bet against more large strategic plays. Watch this space."

He continues: "We believe the commercial market is likely to harden in 2008 by around eight to 10%, which is good news for profitability and will help everyone after a weather-hit year in 2007. We also wait to see if the capital gains tax increase, post-April, will slow the acquisition pace down. My view is, it may temporarily slow it down but not stop it."

Sandy Scott, chairman of the Chartered Insurance Institute, says he believes lessons must be learnt from the floods: "The rapid response of insurers to act quickly and assess claims is commendable. Sadly these positive aspects are never reported enough in the media, and what also became clear from these disasters was the number of uninsured homeowners, a clear signal that we as an industry must educate and inform the consumer what the industry can offer for protection."

Whatever happens in 2008, if it is half as eventful as 2007, insurers will be in for another action packed year.

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