Invest for success

In relaxed, down-to-earth tones, belying his Northern heritage, Andrew Torrance is every bit the chief executive of a company that is making headway with its aims after a profitable and award-winning 2004.

His confidence is understated when referring to 2004's results as 'satisfactory' - particularly as, by all indications, they will be better than the record-breaking results of 2003; a fact that equally belies his determination to take Allianz Cornhill beyond its current position.

But, his strategic vision for the company begins at a grass-roots level.

"We want to differentiate ourselves from our competitors by building better employees primarily, and there has been a consistent investment pattern in this for a number of years now. This is underpinned by the Allianz Cornhill academy - now in its sixth year - which has had a dramatic effect."

AC is currently in the final stage of implementing plans to raise standards among its staff in key areas of the business. Initially, it addressed standards of technical, commercial and leadership skills among managers in areas such as claims and underwriting. This saw 100 of its managers being put through its academy in the first years of its life but now, all 400 of AC's UK managers have undergone training there. Torrance has the conviction that good leadership and technical skills among its managers will ensure AC's future service quality and profitability.

Sales and distribution

In 2005, this programme for improvement will see AC focus particularly on sales and distribution. The company has previously stated that it is looking to double its agency base (PB, January 2005) and is poised to collect small brokers that have found themselves the victims of agency culling by rival providers.

Having waited two years to see if these brokers would be absorbed by the plethora of network offerings, AC is hoping this year to secure better relationships with the small, low-volume - yet profitable - end of the broker hierarchy. Currently piloting a branch dedicated to small brokers in Maidstone, Kent, AC aims to offer good levels of support to small commercial brokers with a dedicated team to cultivate and maintain relationships with these players.

This pilot support branch to smaller brokers is part of its 'regional footprint', Torrance says. "Our regional support to brokers has been consistent in the six years I have been here, but we have reached a stage in the evolution of the broker market where we are placing increased emphasis on the smaller broking community. We have always known this works well, but now we want to lever this for mutual advantage."

As previously stated, funds from the sale of its life arm will underpin these efforts: "This gives us greater flexibility to enable growth in our general arm," Torrance states. But, beyond saying that AC will be investing some of the funds to service brokers, he is reticent on specifics, citing market sensitivity as the reason.

Torrance is philosophical about the risks associated with putting much effort into smaller players that may not be around in a few years by saying: "We hope for smaller players - if they disappear, they will be absorbed by larger players that already have a relationship with us."

Torrance also believes imarket will be a great leveller in allowing small players to maximise their competitiveness. "Brokers need to ensure they have the connectivity to take advantage of imarket, which I believe can enhance their ability to compete in 2005 and beyond," he states. Concerning those insurers cautious of imarket, whose hesitation has been criticised as 'waiting for it to not happen', Torrance is quietly confident that in 2005 this will emerge as the technology initiative the industry has been waiting for. "Nothing I can say will convince the doubters but, I think by the end of 2005, there will be satisfactory take-up."

Despite the fact that AC is set up to cater for commercial customers' emerging buying habits - be they direct or intermediated - Torrance dismisses any significant threat to brokers from its direct operation. In particular, concerning the smaller end of the SME market, he says: "Our research shows that, among very small SMEs - in effect, sole traders - there are those that would buy direct, but this will not scupper our ongoing efforts with small brokers."

On the issue of offshoring, in particular whether savings passed onto customers may contribute to the softening market cycle, Torrance says: "While offshoring can help firms to trade profitably, the expense savings from this activity are about one percentage point of premium income, which is similar to the fluctuations in combined operating ratio, which is small. And, while I think offshoring is a good thing for policyholders, I cannot see it having any significant impact on the market cycle."

Torrance is confident about the durability of intermediated personal lines in the face of offshoring by direct competitors. "You have to look at the different segments of the market in personal lines business; and, while I would not say brokers everywhere can be competitive against direct competition all the time, there is a big marketplace out there with many different customers with different needs.

"Specialist risks are better catered for by brokers. Customers may go through various stages of applying online or on the telephone with a direct writer only to find their time has been wasted when it transpires that needs cannot be catered for. Brokers will pick up business from those that are frustrated with the limitations imposed by direct providers." This is a frustration Torrance says will be exacerbated now because of the extra time an application will take due to regulation.

He continues: "From a service perspective, brokers clearly have an advantage here as they are the ones that really know the market and who will be able to meet a particular client's needs by finding an appropriate provider." He concludes: "It is important to know what parts of the market we are talking about when it comes to brokers' survival in the face of competition - maybe now we are getting down to the level of brokers in the UK that can and intend to compete against the alternatives."

AC's decision to merge its direct and broker service department under one roof last year will also support its brokers' competitive efforts, Torrance says, adding that, for example, AC can provide brokers with knowledge and advice on how to set up a telemarketing initiative or an affinity operation.

With regard to AC's Indian operation, Torrance restates AC's intention to only have 400 staff based there. "The people we have in India are Allianz staff and we have not taken the third-party outsourcing route to ensure service delivery is the same or better as here in the UK. We set up a company there to ensure that the all-important service element would be maintained, as lesser service is not an acceptable trade-off for a lower cost base," he exclaims.

Softening cycle

Now the cycle is softening and, in turn, brokers throughout the country are groaning at the prospect of having to explain this to clients again, Torrance spells out why he is thoroughly convinced this will not lead to a free fall. "Yes, reinsurers' and insurers' balance sheets have benefited from two profitable years, but this does not constitute a full recovery by any means. I think if you asked Royal & SunAlliance, Munich Re or Standard & Poor's, you will not find capital pouring out of anyone's gills. Behind that, there are the Financial Services Authority's requirements for independent capital assessments and independent capital requirements, which charge general insurance firms with having higher levels of capital. Also, the EU's Solvency 2 Initiative is at too-early-a stage to gauge its impact."

On the issue of an oversupply of capital, which can cause the cycle to soften, market opinion abroad suggests that this is happening from Bermuda.

However, Torrance is unconcerned by this: "Bermudian capital is deployed in reinsurance business and the recent reinsurance rate renewals have remained firm. Aviation has had a good loss experience so there have been some reductions there, but property, catastrophe, liability and motor rates are all going up. There is an underlying belief that capital is not at a comfortable level and balance sheets are one factor, but pressure from shareholders to dividend capital to them is another.

"We are also now at a point in the cycle with a more consolidated group of major general insurance players. If you look at the top seven and their market share now, compared with that of 1998/1999, it now looks very different. The smaller number of major players also equates to greater market stability and this time there is no Independent Insurance in the middle. Advances in management information systems also give senior teams better ability to control what is going on at the coalface."

For these reasons, Torrance is adamant that, while it is impossible to eliminate the cyclical nature of insurance, the peaks and troughs will be less pronounced in future than they have been historically.

He adds: "One of the challenges is to align the actions underwriters are taking when quoting and accepting risks with what board members want to happen."

He is also reluctant to prescribe which opportunities brokers ought to be grasping at present but, when coerced, he does voice an opinion about secondary intermediaries. "If I were a broker, I would be looking for secondary players that may, in turn, be looking for a principal. And it is important for those looking to set up introducer or appointed representative schemes to do it soon, as the window of opportunity will only last for the set period of grace the regulator has given for this sector to get its house in order. That said, broker strategy is not my area of expertise and we certainly do not tell our brokers what they ought to do - that is their area of expertise."

The new regime

On the subject of the fledgling regulatory regime, Torrance, while tempered in his observation, is unconvinced of its benefits to consumers. "I was in one of our call centres recently and the extra time taken in repeatedly asking the same 'are you sure you want to continue' questions for regulatory purposes adds, on average, three minutes to the length of a call in order to comply. There is also an additional cost of around £3 per premium and I would question whether it is producing any benefit to consumers.

"Yes, better protection by being given access to recourse via the Financial Services Compen-sation Scheme for complaints about brokers now exists but, beyond that, improvements are less clear. And any way, the majority of complaints are about the carriers, for which there was access to the ombudsman service already available to the public. In this regard, the Association of British Insurers' codes of practice gave guidance to insurers for strong customer-service delivery on claims previously."

Torrance, having been chief executive for only 18 months, is clearly still getting his teeth into the role and is slightly unprepared for the question of how would he like to be remembered when he moves on from his present role. But, eventually, he refers to completion of his current ambitions for AC as being a fitting professional epitaph: "If staff feed back to me that this is a great company to work for, shareholders are happy and standards of products and services to our customers and broker partners are sustained, that would be satisfactory," he replies with typical understatement.

CV

July 2003: Chief executive, Allianz Cornhill

April 1999: Director, Allianz Cornhill, and general manager, broker division

2000: Chief executive, London & Edinburgh Insurance Group

1997: Managing director, L&E commercial lines division

1984: Partner, Boston Consulting Group

1980: joined Boston Consulting Group.