2009: stepping into the unknown

Wow, what a year. Across all modern economic history (dating back to around 1800), what has been termed as the Great Implosion could rank alongside the Great Depression as one of the worst financial disasters. Without huge government support, we may well have witnessed the collapse of the banking system - and presumably capitalism alongside it.

Even Goldman Sachs, the institution considered smarter than all the rest, required a $10bn government bailout; its chief executive officer has recently been in the Sunday Times as part of some uncharacteristic public relations in which he professed to do "God's work". (Admittedly, some of this sequence of events happened at the back end of 2008.)

Trading and financial markets have been under greater scrutiny than ever and insurance has been no exception. Luckily, so far, AIG has proved the only exception in the industry, although it was once one of the biggest companies in the world. The fallout in the UK has been limited as brokers have managed the situation well. AIG has reported solid financials, with its strong relationships with a relatively small number of players proving advantageous, although it has been hit by job losses as rivals have pounced.

The main impact of the crisis was on the consolidators, which were hit as debt became a weighty burden and no longer in vogue. Towergate's owners had to inject personal capital back into the firm as it rearranged banking covenants with 23 lenders, while Oval has raised money from RSA - reportedly £9m - to pay back debt. Meanwhile, Giles, Jelf and Bluefin almost stopped buying companies altogether as they felt their way through the economic pain. Jelf's share price has dropped considerably and is languishing after one of its investors 3i - under 3i QPE - also fell into trouble with former Marsh CEO Bruce Carnegie-Brown leaving.

Across the board, brokers have suffered as businesses cut costs, fail to expand or simply fail. Small and medium-sized businesses have also been trying to save money on insurance and have become more aware of their buying options. For example, many companies have been checking prices on the internet and at other brokers to see if their intermediaries are giving them good deals.

What price loyalty?

When this happens, the holding broker has been running into trouble, especially as the differential in pricing between new business and renewals has been a fundamental problem throughout 2009. Many brokers have told me that they have never seen such a big difference, which has led to more business moving around than ever. No insurer will admit to being the cause of the problem - the larger insurers blame new entrants and smaller carriers - but whoever is to blame, the churn is creating a poor environment for any attempts at rate hardening - and ultimately confusion for brokers and customers alike.

Grant Ellis, chairman at Broker Network, told PB: "It has been an extremely difficult year and I have never seen such a big gap with dual pricing. However, many have become more focused and have made their businesses better."

This year has been one of looking internally, removing bits of unprofitable business and ensuring that there is little waste. Businesses had arguably become complacent or arrogant as they were swept along by a boom that appeared to have little downside. Instead, the economic crisis has allowed good businesses to reassess and build again.

Jerry Clayton, managing director at Essex-based LFC Insurance Brokers, told PB in June: "We are asking our people to dig in. Everyone is aware of the situation." Clayton, though, is running a good business and secured funding through Macquarie bank to expand. Traditional sources of funding were certainly harder to obtain this year as local banking relationships became more centralised and less business-specific.

Brokers have been cutting costs and 75% of them (according to October's PB Sentiment Survey) have made staff cuts, pay freezes - or even pay 'choices' - and cuts to pension contributions. Arguably a little late, Swinton has decided to introduce a 2010 pay freeze for its 5,000 staff. The company insists that it has nothing to do with reconciling up to a potential £8m for mis-selling payment protection insurance after being fined £770,000 by the Financial Services Authority.

Change

The year started with the industry still taking in the decision from the regulator not to introduce mandatory commission disclosure, a great relief for many. However, it did impose stricter guidelines and said that brokers will have to disclose commission on request and that it wanted more transparency over intermediary chains. Steve White, head of compliance and training at the British Insurance Brokers' Association, welcomed the decision as "proportionate and appropriate" and warned brokers to take a proactive role in ensuring the FSA would not need to take further action.

A battle has been raging over how the Financial Services Compensation Scheme should work for brokers, especially because they were required to help compensate the failure of Bradford and Bingley. Both the Institute of Insurance Brokers and Biba lobbied the FSA hard and it is reviewing the situation. Meanwhile, the FSA is also reviewing annual fees for brokers in an attempt to make them more transparent.

Of course, the future of the FSA itself is in doubt after the Conservatives called for the organisation to be removed and replaced by a Consumer Protection Agency, with oversight for regulation moved into the Bank of England. We will have to wait until after the general election - presumably in May - to see what will happen.

Meanwhile, there has been huge change at the UK's leading insurer, Aviva. Pulling back from the consolidators and managing general agents, Aviva also sought to reduce commissions and increase rates. Predictably, Aviva has lost a huge amount of general insurance business, and managed to annoy brokers across the spectrum. However, its strategy of creating the Broker Independence Group and Club 110 is reaping dividends, though these clubs need to be maintained over the next five to 10 years to prove to independent brokers that the firm is serious about the channel.

The television adverts directing the public to brokers is one example of this but intermediaries will need further reassurance, especially because sales and marketing director John Kitson is leaving the business next year (to go fishing) and CEO Igal Mayer is moving to take the group's top job in the US. Mark Hodges, who takes over both general insurance and life from 2010, will have his work cut out.

Consistency appears to be key in troubled economic times and the likes of Allianz, RSA and Zurich have given assured performances in the economic storm. However, Axa's chief executive Philippe Maso has had a hard time trying to reposition Axa, with poor underwriting results, a large reduction in premium and a broker arm bought at the height of the boom. Axa also caused a stir by pulling out of the credit hire trade body, complaining of unfair practices and charges.

Rates

The overriding theme for insurers this year was a lack of rate hardening as smaller players such as QBE, MMA, Brit and LV gained market share. Andrew Torrance, chief executive at Allianz, warned the market in November that "satisfactory rate strength increases‚Ķ are further away than ever" in commercial lines. Once again, his results were propped up by £100m of reserve releases.

As 2009 ends, many will be pleased to see the back of a tough and unprecedented year. Planning for 2010 will be challenging and there will be some shocks along the way; at least you have had some practice for what many consider the 'new normal'.

Here is hoping that insurers get their act together and act collectively to ensure that underwriting profits are prioritised over gaining market share.

2009: key events

February: RSA cuts 1200 jobs to save £70m; Zurich announces a £295m profit in the UK for 2008; Fortis enters a £50m capacity deal with UKU part of Primary ­ taking over from Axa; Giles is third in Sunday Times Buyout Track 100.

March: The Bank of England reduces UK interest rates to an historic low of 0.5% and announces a programme of quantitative easing.

April: Towergate renegotiates its banking facilities; NIG announces the closure of branches in Cardiff, Chelmsford, Exeter, Leicester, Liverpool, Newcastle, Reading and Redhill.

May: PB reaches its 15th anniversary; Peter Cullum, executive chairman of Towergate, is voted the most influential person in the market over that time, Andrew Paddick is runner-up. June: Patrick Snowball leaves Towergate for Australia's Suncorp; Jelf chairman David Walker says we are living in ³strange economic times² in company results; Aon announces an audacious £20m-a-year sponsorship of Manchester United from 2010-2011 for four years; Insurance Age reports nearly 4,500 jobs in insurance have been cut since the start of the credit crunch.

July: David Slade, chairman of Perkins Slade, wins Achievement Award at the British Insurance Awards.

August: Aviva announces a general insurance net written premium fall of £0.5bn for the first half of the year; research from Biba reveals that 58% of brokers claim to have had to fight harder to secure claims payments from insurers in the recession.

September: John Kitson, sales and marketing director at Aviva, says he will quit in March 2010; Ian Gosden, managing director at Somerset-based Higos, wins Broker Manager of the Year at the UK Broker Awards.

October: Swinton is fined £770,000 by the Financial Services Authority for mis-selling PPI and introduces a pay freeze for 2010.

November: RBS is required to sell its insurance divisions within four years to pacify the European Commission; Oval reports loss before tax of £0.4m for year ending May 31, down from £4.6m the previous year ­ EBITDA rises to £18.7m; Finsure set to exit premium credit market; Brit creates a new Netherlands holding company and announces plans to re-list as a Dutch firm in December.