A corporate animal

Although the principles of insurance will never change, insurance companies are constantly needing to remodel themselves to keep pace with the competition and the evolving broker landscape. In 1999, when Chris Hanks took over the commercial underwriting for Cornhill, now Allianz Commercial, brokers considered the company as "an old man with grey hair in front of the fire with a pipe and his dog". Hanks believes over the last eight years the company has taken "dramatic strides to modernise" and its renaming, dropping Cornhill, is all part of this process. One example of change was dropping cricket sponsorship after more than 20 years, although the decision to sponsor Formula 1 is driven by head office in Munich. Hanks comments: "The sponsorship had served its purpose" and that the reassignment of the budget to Germany had created "more bang for the buck".

In 2006, Allianz became the first major European player to restructure as an SE or 'Societas Europae' company in order to simplify the complex financial arrangements in the group. In addition to this transition there has been an administrative nightmare of cutting 5000 jobs in Germany; a further 2500 are being cut at its subsidiary Dresdner Bank. The SE status has meant little change in the UK although, according to Hanks, it will "improve implementation of best practice". For example, if Allianz does motor segmentation well in France then this should be replicated in the UK and Germany.

Hanks is in charge of a £900m book of gross written premium of commercial business which comes from around 3000 agents. This dominates Allianz's UK portfolio, which also includes £300m of personal lines and £300m of schemes business - such as warranties.

The nationals, including Marsh, Aon and Willis, control around 40% of the commercial premium in the UK, which makes up around 25% of Allianz's book or around £235m, an increase of 8% since 1999. The larger top tier regional brokers, such as Oval, Jelf and Towergate, place around £150m and a further £300m is made up from smaller brokers.

The growth has been mainly organic as there have been no mainstream insurer buys, unlike some of its leading competitors. There have been a number of high-profile niche acquisitions, such as Premierline Direct, which was a business already predominantly insured by Allianz. Personal lines broker, Home and Legacy, was another significant purchase. However, there appears little desire to add a big UK insurer to the group.

Hanks has been at the opposite end of the takeover spectrum. In 1998, Allianz bought a controlling share in France-based AGF, where he had experience running a branch network and a personal lines book. The UK business of AGF, a total of £500m of premium and 658 staff, was put into runoff. Allianz kept the renewal rights but felt AGF was not a good enough fit with Cornhill and the transaction coincided with an unprofitable UK market.

Some brokers complain that Allianz gives Premierline, which has around £20m GWP, lower prices for clients than other brokers. Hanks claims quotes can be more or less expensive and says Premierline provides different rating factors such as lifestyle and greater segmentation. He defends the approach: "We only quote on half of the calls that come in and only sell 20% of those - around 5% or 10% of that comes in the door. This screams at me that we are not charging cheaper than everyone. We try to de-duplicate existing Allianz clients in all our mail outs but it is not easy and sometimes we get it wrong which causes some problems. If a broker holds a client and they get one from Premierline that is lower we will give the broker that quote. All I'm swapping is the acquisition cost - instead of spending commission we will spend it on advertising."

Commenting on the potential of the direct model, he says: "Over time - if we pay 20% on commission there is not a huge difference. If you pay 40% (commission), the SME direct model should substantially undercut that, which is a real challenge for brokers in the future as people develop products for the internet with reduced margin. This will throw the spotlight onto some of the SME pricing which is around. There is a period of time when this will settle down." However, Hanks thinks that no more than half of SMEs will buy direct.

Using a practical example as to how prices may develop, Hanks says: "If you rate a hairdressers you want to know the postcode, what floor it is and how many washbasins there are. Then you have all the data you need to quote. I couldn't put that into a broker market, as all my competitors are asking 20 questions. However, it is possible to be more dynamic." Hanks feels that existing methodologies are about to change. He continues: "The products we are selling haven't changed much since the Second World War - pretty bog standard - is that going to be the same in 10 years time? I would venture there is a new breed of SME product that will need to come out, instead of putting your standard product online." Cryptically he adds: "Going forward a few years, insurers may be working with other kinds of partners and will be finding a much better product offering for the SME sector."

Hanks also believes a variety of factors will emerge to make the direct web offering more attractive. He says: "The enquiry rate for SME business over the web is exponential - it is booming but not many of them are buying. Why? You need advice and guidance, although over the years people will become more confident and buy their commercial insurance online. Secondly, market rates in commercial are soft - if anybody finds a better price then they can go back to their broker who will match it - but that will change as prices harden. Thirdly, the pricing over commercial business is undeveloped."

Tied deals

One of Allianz's recent strategies has been to try and win solo deals for very small SME business or micro-business with premiums less than £5000 - although this limit is sometimes £10,000. Hanks comments: "When the market hardened last time we became pretty good at the mid to large-sized risks, however, we took our eye off the ball for SME business. It is pretty profitable but quite costly to administer. We have been trying to balance our portfolio and, therefore, have had a particular focus on growing fast in this SME area. At the very small SME end it is attractive to put 100% of the book through, because otherwise we are struggling to make the economics pay."

The deals, which vary from three to five years, underwrite risks for contractors, office, retail, small commercial and property owners' cover. Similar arrangements have been signed up with HSBC Insurance Brokers, Manchester-based CBG Group, Somerset-based Higos, Oval, Ayr-based Mackay and Bristol-based Tett Hamilton. Hanks stresses each of these wins have only happened after tender processes and defends the independence of the transactions by saying that the customer ultimately has a choice over which broker they use, and that the client cannot be forced to use Allianz where it specifically requests otherwise. Stephen Darcy, managing director of insurance broking operations at the CBG Group has described to PB that three out of seven presentations for this business from insurers was "dreadfully poor". According to Hanks such deals are attractive to brokers who have volume or are buying brokers. Hanks says the first couple of deals were "like taking candy from a baby, as some of our competitors hadn't realised the value and now the competition is far more intense as others have got their act together."

E-trading

Does Hanks think that any of these deals spell trouble for imarket - a system set-up to make these transactions easier? Hanks responds: "Imarket is much bigger than comparative quotes for small business. We could use imarket on a solo deal and we expect, over time, more business to be done via this route. It has been difficult but the idea that from one portal Allianz can hit all the software houses is great. I expect my brokers eventually to deal with me via imarket, even larger risks so we can share all the information. I only want to build an interface once. We still receive 20 to 30-page documents by fax and we re-key them. The sooner we use imarket as the base point for all our records the more efficient we will become."

Another evolutionary process in broking is the rapid rate firms are being acquired. Broker consolidation is helping Hanks and, therefore, he is prepared to pay more commission to the consolidators. He says a strategic alliance will contribute more volume for insurers and, if 10 offices are owned by one company, there are efficiencies dealing with central office to 'get' the business. In addition, the same computer systems also save costs and the size of the business allows greater work transfer. However, he thinks the level of remuneration has risen "higher than it should have done" for some business and says it does not make "10 or 20 points difference". He cites the internal costs at the insurer, and that he still needs his "core infrastructure" making it difficult to pay the consolidators more money and maintain branch offices. Allianz has not closed a branch since 1999. Hanks believes the reason you are seeing a decline in insurers' branch models - and moving to processing centres and offshore locations is partly as a result of consolidation, although Allianz's last two branch openings, Newcastle and Cardiff, are sales offices, and Hanks is converting the Nottingham office into "more of a sales office".

Commenting on Axa's acquisitions of Smart and Cook, Stuart Alexander and Layton Blackham, he says: "We don't see the value in buying mainstream commercial brokers - we think it is a market for independent brokers. If you buy one you have potential conflicts of interest, and as soon as they direct business towards you then you have undermined the independent franchise. You are very close to your core business activity and the temptation will be to make sure some of that business is directed towards you. It is hard to have a clear line of independence and we think it looks too blurred." Hanks warns that any business that is tied to Axa will be aggressively targeted by Allianz through independent brokers "on the basis they want independent advice".

He adds: "If you present yourself as an independent intermediary but some of the book is closed, it is not good news and all the other brokers will say that's not right."

Stakes

Hanks has made some intriguing strategic decisions such as buying into Alternative Investment Market-listed Jelf and CBG Group. He concedes that buying 5% will not stop the businesses selling but says he did it because they asked. He explains: "They wanted some money off the table so they could realise some of the value, or to provide money for acquisitions or computer systems." Allianz already provide loans and advanced commissions to brokers, including some members of the Cobra Network. He comments: "I would much rather lend money than buy a stake in the business."

And how are things going with Towergate? Hanks replies diplomatically: "We find their business model difficult for us and we don't have such a big account. We are happy to trade in some areas and we are now writing a couple of their zones such as Care zone."

As to Allianz's year so far, Hanks says: "Growth is 11% this year and the SME deals are generating increases. We are now behind underwriting agencies with Evolution and M4 and we launched excess of loss liability and our engineering is strong. Nothing dominates but we are working hard, having put in place some building blocks." However, everything is not rosy. He continues: "Our open market business is under pressure because rates haven't responded very much. Our underlying business is down a bit but our new initiative business is up, giving us growth overall. We need to put some rate on in this market."

There are some signs this is now happening. Hanks says: "We have positive increases across fleet - around a couple of points - a trend I see continuing. The floods will mean that property rates will stabilise and stop falling through the floor. One thing that surprises me is that EL rates have still been falling recently, and that is absolutely ridiculous and we will correct that as the year goes on. Without these rains I would have been predicting rate increases in 2009 but I think we will see them towards the end of the year and the beginning of next year. Most people were running their commercial books with historically good profits but current business was at closer to break even."

The years 2003 to 2005 were extremely profitable for insurance. Is this as good as it gets? Hank comments: "The last couple of years are as good as it gets - one thing that surprises us was that bodily injury awards have only being going up by 5%, whereas before that they were going up at 10%, so we have had a benign weather, a smaller increase in bodily claims and a stock market recovery."

However, he has this stark warning for the market: "We have delayed a series of less good results by a year or two but they are coming. The train is in the tunnel, the light is on and there is nothing you can do about it now because most people have written business at rates that are not good enough to pay all the losses."

Where does Hanks's future lie? Hanks rules out moving to broking like some of his counterparts. He says: "I am a corporate animal, hands on - I'm here. I have the best job in the company. Andrew Torrance may be CEO but he has to spend his time managing the shareholder whereas I can run the business."

CV

2003: General manager and board member, Allianz Commercial

1998: Underwriting executive, Cornhill Insurance

1992: General manager, AGF personal lines

1987: Head of branches, AGF Insurance

1984: Assistant general manager, NEM

1968: Professional trainee, National Employers Mutual.