Commission missing word from NU cost cuts

At an Aviva investor and analyst conference in New York last month, Igal Mayer, chief executive of Norwich Union's UK general insurance operation, delivered a slideshow entitled 'Delivering across the cycle'. One of the first slides included a footnote under 'Consistently delivering performance - 98% or better COR since 2004' which read (1) Excludes impact of 2007 summer floods.

The problem is that the target is to meet or beat a combined ratio of 98% and a £400m exceptional UK weather loss could throw this plan into some disarray. The impact of the floods should not be underestimated, and have hit many insurers hard this year. In fact, Norwich Union has already reacted with a 10% rate increase in homeowners in July.

In the last slide of his presentation, Mayer promised to deliver on the "promise of scale" with cost savings of £200m in 2008. Aviva is already half way through cutting 4,000 jobs, and has begun to slash its IT and marketing departments. The efficiencies are now almost overlapping and it is hard to keep up: the previous review was planned to save £250m per year (which cost an initial £250m) in the UK from 2008 in addition to the £130m of savings from the RAC merger. Hence, in a damage limitation exercise NU is already saying that the next set of savings will not come from job cuts alone - but, for example, by moving to a single insurance IT platform for personal lines. The cuts include a £76m reduction in marketing spend, £33m savings in IT and £52m from projects. The expense ratio is set to be reduced from 13.9% to 12.4%. There are also plans to reduce its product base from 70 to under 20 and have a clear focus on "manufacturing"; more extensive plans for the cuts are to be announced.

The dynamics of the broker market are changing rapidly, and yet there is no mention of commissions in Aviva's 'One Aviva, twice the value' report. This must be music to the broker consolidators' ears, as with their commission untouched, they will not need to focus on cutting their own inefficiencies, which will inevitably have crept into their businesses. How long before insurers decide to cut their commissions to the consolidators rather then cut their own staff base?