Top ten insurers - Mothers of reinvention

The first issue of Professional Broking, published in 1994, carried advertisements from the likes of Sun Alliance Insurance UK, Eagle Star, Iron Trades, Provincial Insurance, Guardian Royal Exchange, General Accident and of course Independent Insurance.

How things have changed. The scale of consolidation witnessed in the insurance industry in the last decade was unprecedented. In 1998 and 1999 alone there were more than a dozen mergers and acquisitions involving UK insurers with transactions valued at between £100m and over £7bn.

The largest of the mergers was that undertaken by CGU - itself already the subject of an earlier merger - and Norwich Union, now the largest UK insurer. Ken Wallace, intermediary business director at NU, says: "Pulling off the biggest merger, turning it around and bringing it all together was a real high point."

This M&A activity has changed the face of UK insurance and its impact will be long lasting. Francois Xavier-Boisseau, managing director of Groupama Insurances, believes insurer consolidation had the biggest single impact in the last 10 years.

He says: "If you look at the top 10 companies, they were controlling about 40% 10 years ago, now the top five control about 40% to 50%. You can see the pace of consolidation."

Figures from Datamonitor bear this out: in 1997 the top 10 insurers controlled just over half of the market. Just five years later it had risen to 60%.

One visible downside of some insurer mergers as far as brokers are concerned has been a shortage of underwriting expertise and inconsistent levels of service.

Howard Pearson, managing director of Miller Insurance Services, says some insurers have forgotten how to listen: "Insurers have become very centrally controlled. Perhaps they spend less time thinking about what helps brokers and are spending more time delivering their own business plan and less time listening to the customer. In a hard market that has been the right thing to do."

However, he says that insurers are now, on the whole, running better businesses. "And that is better for the industry. There is more consistency."

Xavier-Boisseau adds: "As far as brokers are concerned there has been a lot of disruption to service. There has been a loss of competent people. But, on the positive side they probably have a more secure risk area because they have stronger capital base."

For most, 2001 stands out as the year that shook the market, not least because of the consequences of the terrorist attacks of 11 September.

In January 2001 the directors of Chester Street Insurance Holdings - primarily an employers' liability insurer - declared insolvency. Just five months later Independent Insurance fell from grace - liquidators were appointed in June.

Reflecting on their downfall, John Parker, head of general insurance at the Association of British Insurers, describes their failure as the low point of the last decade. However, Independent's demise brought a benefit to the rest of the market. Parker explains: "Because they were so underpricing with some risks they were a drag on the market."

It seems that greater discipline has been a positive result of failures of high-profile insurers such as Independent. Parker adds: "Overall, the industry seems to be behaving quite responsibly. There isn't the descent into a soft market that there has been in previous cycles."

Andrew Paddick, director general of the Institute of Insurance Brokers, says: "We won't get as many reckless underwriters as before. The market can not ignore the reckless players. It has become more responsible and it is in everyone's interest, not least the consumer."

Parker also points to the change in the investment environment as a key driver in today's market. "Clearly interest rates are a lot lower than 10 years ago, so the temptation to indulge in cash-flow underwriting is less. Shareholders are more specific about what they want in terms of return on investment."

Wallace adds: "1994 was the last time the market made an underwriting profit. In 2003 we were doing the same thing. It takes 10 years to get back to it and 2003 was probably the top of the cycle. Fewer players means we are more stable and more transparent. We are looking for a softer landing."

Just as there were more insurers 10 years ago, today there are more distribution channels for insurance. Wallace believes the rise of direct writers and changes in distribution have had the most important impact, particularly in personal lines.

He says: "It took insurers and brokers some time to come to terms with the idea of multi-distribution and there were conflicts, but they realised it wasn't insurers driving that but customers' needs. It has changed the way brokers handle personal lines insurance. They now concentrate on large-scale business, such as BDML, Budget and AA, which generate large volumes or are niche, or the business is attached to commercial lines insurance."

Paddick believes most direct writers like Direct Line, which controlled over 6% of the market in 2002 according to Datamonitor, have plateaued in terms of their premium income.

He says: "Now they are doing deals with supermarkets and introducing middlemen in order to grow. Some supermarkets are doing a lot of personal lines business."

Although relationships between brokers and insurers have not changed much over the years, in principle, Paddick thinks they have changed considerably in practice. He explains: "Insurers want fairly large minimum accounts.

I think IT will change that. Those who say they want a minimum amount of business will plateau. Then they will ask how they can get more businesses.

They will go back for the smaller business because, collectively, it might add up."