Looking back - Ten years on - a retrospective

If an insurer from 100 years ago travelled through time to the early 1990s, the landmarks of the industry - loss adjuster Thomas Howell and insurers Commercial Union and Eagle Star - would have still been in existence.

However, in the last 10 years, these have all but vanished. Lloyd's did away with a 300-year-old tradition by allowing corporate capital to be invested, as opposed to individual Names. Policyholders' buying habits shifted as direct writers stole market share in motor. And the growing impact of European legislation, which, through the Insurance Mediation Directive, set the industry on a path towards state regulation.

These are among the many significant changes but, in the climate into which Professional Broking was born, much speculation reigned over the future viability of Lloyd's after a series of short and long-tail claims of the late 1980s and early 1990s. The merger between The Royal and Sun Alliance in 1996 kicked off the round of mergers that radically reshaped the UK insurance industry. Names that had been around for the best part of the 20th century - and some for even longer - were lost as the market contracted. However, the Aviva-style world-class force that Royal & SunAlliance was hoped would become succumbed to another phenomenon that had begun to show its true colours in the 1990s: the long-tail liability.

Asbestos claims, particularly from the US, began to bend the rules of liability covers that were never meant to cater for long-tail industrial disease. While it remains to be seen whether RSA will be hamstrung by its US liabilities, the collapse of Iron Trades demonstrated the catastrophic effects such claims can have.

It was also in the 1990s that a phenomenon, widely regarded to originate from the US, began to emerge. While asbestosis claims saw covers provided in the utmost faith stretched beyond the limitations with which they were initially conceived, the attitude abroad in society had simultaneously shifted regarding damages recoverable via litigation. Enter the compensation culture controversy.

Compensation culture

Bob Still, claims director of MMA, observes how industrial disease has had a significant impact but also highlights how, historically, the industry had written covers in silos. He also recalls the 'huge hammering' the industry experienced around the same time through subsidence and floods.

Insurers' branch networks were also common when Professional Broking came into being. Big names such as Norwich Union and General Accident had 50 or 60 branches each - complete with underwriters with a reasonable amount of authority. Following consolidation, by the late 1990s the trend towards centralisation of this authority diminished the personal relationship-driven transactions between broker and underwriter.

UK insurers were subject to takeovers from European insurers in the 1990s because of weak management and because they were loss-making, according to Oliver Laughton-Scott, partner of IMAS. He continues: "UK insurers had to merge to gain the collective strength to survive. European insurers were better protected in their home market and looked overseas for opportunities." He also claims that, through technology, in parallel with other industries, the manufacturing process in insurance became easier, which led to real value shifting to the distribution channel. "Pressures on manufacturing are intense and brokers are close to customers. That is why some insurers went the direct route to own the end-customers," he says.

Laughton-Scott also observes that, because the manufacturing side of insurance became easier, particularly in the last five years, it has become easier to outsource. "This has led to the rise of the non-insurance brand, such as Saga or Tesco, and the commoditisation of products," he adds.

Chris Hanks, general manager of Allianz Cornhill Commercial, agrees that the European insurers had to look elsewhere for acquisitions due to better protection. He explains: "This protection, partly through legislation and partly because of cross-holdings, made it difficult for these insurers to execute takeovers in their homelands. Because people like buying insurance from indigenous insurers, acquisition was a natural foothold for European players to gain access to new territories."

Hanks also agrees that weak management plus the fact that UK insurers have lost £20bn of shareholders' money in the last 10 years made them vulnerable to takeover. He continues: "2003 was the first year of profit in a long time and I do not think the major insurers will let the market slump into a soft market. Allianz, NU and RSA all put prices up in the first quarter and the new chief executives have better discipline and expertise to prevent a free fall in rates. Every soft market has been supported by strong stocks, which also makes a very soft market unlikely at the moment.

Following the big mergers and acquisitions of the mid 1990s, many of the enlarged companies offered early retirement to some of their specialists.

Risk-averse volume selling, particularly in personal lines, with a desire to cater for less complex risks was the trend of the day. While some of these skills moved into brokerages, many left the industry, leading to criticism of the large insurers for 'dumbing down' underwriting and taking a 'tick box' approach to quantifying risk. This change was also predicated on the promise of technology, which anticipated technological advances that would lead to the creation of systems capable of replacing underwriters.

However, commercial clients with complex risks still needed cover and, in 1997, Peter Cullum and Paul Dyer saw an opportunity. The result was the formation of Towergate, which is regarded by many in the industry to have revolutionised scheme and niche risks business. "The big players did take their eye off specialist risks," says Dyer, adding "Many of the experienced personnel available were offered early retirement by the main composites and the industry lost a vast reservoir of talent. A huge void developed between supply and demand at that time but some of these services have come back out of retirement since then. Our oldest staff member is 73. The 1990s saw the 20-year-old operating a screen-driven mass collection of data. That was the dream, but the world is complex."

Steve Radford of the Chartered Insurance Institute says that recent years have seen a backlash towards the skills drain of the 1990s, with training and competence being sought by staff at all levels in insurers and brokers.

"The Financial Services Authority is a catalyst for T&C, but many of the larger firms would be embracing this now anyway," he says. He also adds that demand has seen the evolution of the qualifications offered by the CII from academic to more vocational packages. "There is great demand for technical knowledge that can be directly applied in a business environment.

And this is a by-product of the consolidation of the mid 1990s." He adds that another factor driving the requirement for technical skills is that insurers can no longer rely on investment income and so require expertise to ensure underwriting profit. "Brokers wanting to help clients manage risk also require a high level of technical knowledge to genuinely add value, which is also creating demand for vocational qualifications," he says.

Radford also cites the failure of a great expectation that IT would revolutionise underwriting. Dyer concurs: "There was an expectation that technology would guarantee underwriting profit but this was far from realised." He adds: "The other great strategic dilemma for insurers in the 1990s was the future of distribution, whether direct marketing through mail or by telephone, the internet or bancassurance as brokers were regarded as 'dead men walking'.

Where should an insurer spend its marketing budget? Many tried various combinations. Although there were attempts by brokers to boycott insurers that set up direct arms, the fact that an insurer needs a multi-distribution channel was gradually and begrudgingly accepted."

While the internet and direct writers were considered to be 'holding the weapons' that would eventually be used to kill off brokers, it did not happen. "And now it is the FSA that may succeed where years of attritional warfare have failed," Dyer adds.

He also cites the change in risk factors and commercial life. "Cultural factors are also central to the last 10 years with the advent of compensation culture. Also, the education of the population. People now have greater levels of confidence that awards can be attained in particular circumstances. But, a little knowledge can be a dangerous thing," he says.

Despite the great knocks the industry weathered during the last 10 years, Cullum is optimistic about its legacy. "My overarching view of the last 10 years is that it has left a wealth of opportunity. Towergate and Folgate are very fortunate to have been born into a period of such great opportunity - and very few industries possess the same degree of opportunity that exists in insurance. There is no doubt that the industry in the last 10 years has not seen the level of changes since Cuthbert Heath came out of Lloyd's in 1913 and set up a company that eventually became the London market."

Eric Galbraith, chief executive of the British Insurance Brokers' Association, picks up Cullum's point about industry expectations regarding IT. "We were supposed to have this sorted by now," he says bluntly. "Despite predictions to the contrary, we still require humans at the core of the underwriting process. Standardisation needs to happen to achieve better communication between manufacturer and distribution," he adds.

The last 10 years has also borne witness to the scrapes and squabbles that led up to self-regulation being abolished in favour of state regulation.

While many in the industry often exhibit a degree of shame about how insurance could not get its house in order, self-regulation has also failed in banking and stockbroking. Moreover, European legislation in the form of the Insurance Mediation Directive required greater protection for policyholders and the UK government passed the regulatory mantle to the FSA.

Prior to this, a private members' bill brought by Sir John Page in the late 1970s led to the Insurance Brokers' Registration Act in 1977 and subsequently the creation of the Insurance Brokers Registration Council.

As a private members' bill, the act had no regulatory 'teeth' and the IBRC was run on a voluntary basis. Nonetheless, the IBRC's efforts to promote the advantage of greater levels of protection to consumers through its compensation fund was beginning to be picked up by the national press.

However, it was irrevocably damaged in the mid 1980s when the Signal Life Company, selling high-return bonds, emerged to be a scam. Consumers that had purchased the bonds through IBRC brokers sought redress, which was dragged through the courts for years, leading to some big battles in the 1990s.

Broker extinction

By the mid 1990s, many analysts were predicting that direct writers would take a 70% to 80% lion's share of the personal lines motor market as direct writers' highly targeted foray into the market was bamboozling brokers.

Brokers initially met the challenge by trying to compete head-to-head with the new entrants, which targeted middle-aged drivers with blemish-free claims records. However, brokers eventually realised that not all motorists fitted this profile and changed tactics to mop up the business declined by the direct players. Emphasising the advantage that brokers offered, such as face-to-face advice, a wider choice of products, payment flexibility and service proposition was the recommended counter-attack contained in a help pack published by Zurich at the time in support of its intermediaries. This offensive was the subject of a news article in the first edition of Professional Broking in May 1994.

In 1994 the future health of brokers appeared assured enough to a small publishing company called Timothy Benn, which launched Professional Broking amid the background of the emerging threat of the direct writers.

Prior to this, the Lloyd's market had seen its share of torment. The hurricane that battered south England in October 1987, Hurricane Hugo in the US, the Piper Alpha oil-rig disaster (pictured), Exxon Valdez and storms in the early 1990s saw Lloyd's haemorrhaging money. During a period in the late 1980s and early 1990s, the crisis that enveloped Lloyd's saw it lose, on average, £5bn per annum for several years. However, at that time, 25% of syndicates remained profitable - a fact that did not escape the attention of Lloyd's management of the time. The ensuing reforms sought to implement best practice and put procedures in place to limit the effects of the hugely damaging London Market excess-of-loss spiral.

In hindsight, this tumultuous period, while bloody, probably indirectly saved Lloyd's. The flurry of blows Lloyd's endured during this period could be regarded as an inoculation - causing it to rally and regroup and emerge fit enough to withstand the largest loss in insurance history, caused by a single terrorist act on 11 September 2001 - an event that caused the UK government to reluctantly step in as insurer of last resort, after carriers struck off third-party war and terrorism cover from aviation policies, rendering planes grounded. Arguably, if this event had occurred between 1987 and 1997, the Lloyd's name would have been consigned to the history books along with Iron Trades, Chester Street, Independent and Drake, among others.

The collapse of Drake Insurance in May 2000 highlighted the weakness of the regulatory regime under the Department of Trade and Industry. Technically insolvent for three years before its eventual demise, Drake's owners put off the regulator with the promise of recapitalisation by its American parent. On 3 July 2000, the General Insurance Standards Council came into being but this was not enough to prevent the collapse of Independent in June 2001. The government came under increasing pressure and suffered bad publicity following the collapses in quick succession within this 18-month period. This arguably led to the UK government's decision to bring regulation under its control. While the Insurance Mediation Directive is widely regarded as the determining factor in the UK industry being placed under statutory regulation, news of collapses in the UK may have strengthened political resolve in Brussels.

In March 1998, the then Lord Chancellor outlined in the House of Lords plans to phase out legal aid and replace it with a no win, no fee system.

While eventually, insurers stoically accepted that Lord Woolf's reforms would speed up the processing of claims, extra costs would be incurred.

Of course, these were passed on to the customer but many felt disgruntled that the government had indirectly passed costs to the electorate via insurers.

Eric Galbraith's comments are typically philosophical about the market's acceptance of yet another alteration in conditions in a period of unprecedented change: "The market developed and changed in order to provide customers with new services," he states, adding: "We are now seeing the 'after the event' and 'before the event' market mature and develop properly, after initial providers' business models were unsustainable."

Still reiterates: "Legal costs have gone up significantly but I am ambivalent." Referring to the adaptability of insurance firms generally, he continues: "The industry needs a good shake-up now and then, as this drives out complacency. People adapt when they are forced to and it is pointless to fight change. It is wiser to try to exercise influence and try to make an organisation more compatible. This has much to do with the liability market - in the past, finite ends to tails could be seen."

Still adds that another unprecedented occurrence of the last 10 years was Lloyd's being named in a slavery lawsuit. "Who, 100 years ago, would have predicted that?" he asks.

Hanks considers the massive changes that have occurred in the industry over the last 10 years have bred very high-quality management, which "Will stand us in good stead for the next 10 years."

David Worsfold, secretary for the All Party Parliamentary Group on Insurance says that the industry has also gained a better ear with government during this period than ever before. He explains: "I have little doubt that some of the recent encouraging signs have a lot to do with the huge rise in the cost of insurance over the last couple of years, which has forced the availability/affordability argument to the forefront."

He adds: "Stephen Byers recently lashed out at the perceived effects of the compensation culture in no uncertain terms and this was followed up by the Education Secretary, Charles Clarke, when he spoke at a recent teachers' union conference.

Rehabilitation is a subject that the insurance industry has been trying to engage government on for several years; now it looks to be making serious progress.

The Department of Work and Pensions has issued a draft proposal on vocational rehabilitation. The Home Office also wants to tighten up on all sorts of financial fraud and, while stopping short of creating a specific offence of insurance fraud, has produced a set of proposals that go further than anyone in the industry could have hoped.

Remember the days soon after the election of the Labour government in 1997 when the only government attention the insurance industry was receiving was from Helen Liddell 'naming and shaming' major firms for their failure to face up to their part in the pensions mis-selling scandal? Fortunately, we have come along way since then.

HEADLINES - HIGHLIGHTS AND LOW POINTS

- February 2004 - Norwich Union shuts high-street broking arm Hill House Hammond

- January 2004 - Police investigation into the collapse of Tribune

- December 2002 - Administrator confirms Ward Evans sale

- October 2002 - eMarket portal set for February 2003 launch

- June 2002 - Sirius Financial Systems launches commercial lines portal Stargate

- December 2001 - Financial Services Authority to take over from the General Insurance Standards Council

- December 2001 - Insurers Enron exposures mount

- October 2001 - Terrorist attacks hit industry hard

- July 2001 - Independent Insurance collapse leads to rates rise

- June 2000 - Liquidators take stock of collapsed insurer Drake

- April 2000 - General Insurance Standards Council to open doors in July

- March 2000 - CGU name to disappear following merger with Norwich Union

- October 1999 - Northern Star jobs go as bosses quit following Fortis takeover

- September 1999 - GroupamaGAN office closures following GAN and Lombard merger

- June 1999 - Generali quits UK retail after sale to Fortis

- January 1999 - Axe falls on 2000 Eagle Star agencies at Zurich Financial

- December 1998 - Italian carriers up London presence

- July 1998 - AGF brand axed after Cornhill takeover

- May 1998 - Insurance GB goes into run-off

- June 1997 - Eagle Star set for world first with motor cover via the internet

- June 1996 - Takeover war hots up among insurers

- 1994 - Norwich Union considers going down direct route.