EUROPE: INSURANCE AT RISK. - The industry which offers protection against life's disasters is itself running for cover as a cull starts throughout Europe.

by Peter Wilsher.
Last Updated: 31 Aug 2010

The industry which offers protection against life's disasters is itself running for cover as a cull starts throughout Europe.

Europe's huge, fragmented, often spectacularly profitable but now widely troubled insurance industry needs a large dose of its own product. The next 10 years threatens to be a period of unprecedented risk. Many of today's most impregnable-seeming participants will find themselves challenged, crippled, shrunken or defunct - even some which have been household names for centuries.

At present there are are well over 3,000 companies offering protection against life's disasters within the borders of the new, extended European economic area. Few expect even half of these to survive the rigours of the next decade, as a lethal combination of runaway costs, customer resistance, reduced government sympathy and savagely increased competition works to decimate their ranks. Best estimates suggest that, overall, the current degree of overcapacity is at least 30% - whether you are looking at sales staff, administrative back-up or capital employed. And the painful process of squeezing this out has as yet barely begun. It could easily mean, among other things, the elimination of 300,000 or more jobs from the industry's million-strong European payroll.

The date insurance men have long had - red-ringed and underlined - in their diaries is 1 July, 1994. That is when the Third EC Insurance Directives come into effect, extending the concept of the European single market to embrace every corner of the life, casualty, industrial and catastrophe business. By creating a 'passport' which allows any company meeting the standards set by its own home authorities to operate anywhere in the Community, these effectively strip away most of the protection which has allowed the industry - and particularly its weaker, more complacent members - to operate inside a cosy cocoon of national laws, regulated premiums and restrictive investment rules.

Strategies to counter the perceived dangers have long preoccupied the sector's leading boardrooms. First thoughts tended to favour the cultivation of sheer size, either through mergers, alliances or direct takeovers. Acquisition activities in the industry have expanded more than fivefold since the start of the 1990s and are now running at around 200 a year, with two-thirds of these involving some kind of cross-border linkage. Several of the heavyweights, such as Germany's Allianz, France's soon-to-be-privatised Union des Assurances de Paris (UAP) and Switzerland's highly aggressive Zurich group are well on the way towards creating a fully-fledged European network. But many such arrangements have run into deep trouble. Even inside a single country it has often proved difficult or impossible to resolve differences of history, culture and executive self-esteem, and when different languages and political systems are involved the problems can quickly become insurmountable. Even when these national and international networks are safely brought to birth, there is no certainty that the offspring will necessarily flourish. Dangers lurk everywhere, and neither size nor long track records offer any guarantee of immunity.

Assicurazioni Generali, whose winged lion logo has proudly decorated its Trieste headquarters since 1831, has had more experience than most of running a far-flung foreign empire. Almost two-thirds of its £8 billion in annual premium income comes from outside Italy, and in France it has long been the largest non-native insurer.

Yet both its London and Paris operations have recently generated little but headaches. For two years running the non-life premiums from its already unprofitable UK operations have been more than wiped out by an inexorable flood of claims, and similarly France, which accounts for almost one-sixth of of its worldwide revenues, has been pushed into the red with non-life losses of around £35 million. All that has already caused what Generali's French supremo, Robert Rosa, calls 'a fantastic loss of managerial energy' and hardly augurs well for the group's resilience when the full force of cross-border competition is unleashed later this year.

Yet Generali is one of the established European giants, fifth in the premier league, and surpassed in premium earnings only by Allianz (at £20 billion), UAP (£13.6 million), AXA (£10 billion) and Zurich (£8.5 billion). It is significantly ahead of the leading British contender, Prudential, which ranks only at number eight. Its problems carry all sorts of warnings for the smaller fry, some of whom have already had their fingers badly burned. Guardian Royal Exchange, for example, has retired hurt from an unsuccessful attempt to become a force on Generali's own Italian stamping ground, and the main Scandinavian contenders, like Norway's Uni Storebrand and its Danish partner Hafnia (now largely absorbed into a grouping ultimately controlled by Britain's Sun Alliance) almost destroyed themselves last year in their efforts to swallow the Swedish Skandia group.

So far the best of the Big Five have managed to avoid the worst of such pitfalls. AXA, the second major Gallic contender, professes itself happy with its big British acquisition Equity and Law, and like most of the others is putting together a chain of relationships through which it can establish a substantial presence in the relatively under-insured markets around the Mediterranean.

UAP is currently celebrating its acquisition of control in Colonia, Germany's second-largest insurer, which it recently bought, along with a packet of other international insurance assets, from Compagnie Financiere de Suez. With a substantial British presence already established through its 50% ownership of Sun Life and plans, later this year, to complete purchase of a leading London-based casualty insurer, UAP's directors reckon they are close to completing their 'European perimeter'. The acquisition phase is essentially over, says the new chairman, Jacques Friedmann (if only for lack of sufficient further resources), and the focus is firmly on internal growth. But that has certainly not set any serious limits to the group's ambition - the target, now officially declared, is to outstrip Allianz and become Europe's number one.

Allianz itself, of course, may well have other ideas. Its chief executive, Henning Schulte-Noelle, derisively rejects any suggestion that the company's overwhelming dominance - especially in its own home market - might be in any way under threat. While accepting that UAP may have been a more adventurous explorer of extra-territorial opportunities, with 65% of its premium income originating outside France, against Allianz's 47% outside Germany, he emphatically refuses to acknowledge this as any serious sign of weakness. 'There will be certain insurers who withdraw from the current difficult market,' he says. But he is confident that Allianz can see off the competition without resorting to outside entanglements. 'We will not merge ourselves,' he assured last autumn's annual news conference.

Such insouciance is not universally shared. Switzerland's fast-growing and formidably self-confident Zurich Insurance is notably unimpressed by survival plans which depend mainly on size, market-share grabbing and claims of traditional strength. Its tough and highly innovative boss, Rolf Huppi, who took over just three years ago as president and chief executive, is convinced that a sprawling multinational approach with an unfocused determination to sell all products in all markets is a recipe for disaster. His own strategy has been to turn Zurich, despite its size and global presence, into a tightly-focused web of super-specialists. Only by defining and meeting the needs of particular, often extremely narrow customer groups, he contends, can an insurance provider justify the premium rates that will continue to generate and guarantee substantial, continuing profits. As a result you will find Zurich providing customised cover for consumer groups as varied and specific as American car dealers, Swiss dentists, German supermarket owners and the employees of British local authorities. At the same time they are systematically weeding out what they regard as dud businesses, such as industrial fire risk in Germany and mainstream auto insurance in Spain.

This is not, in any sense, a random selection. Under Huppi's guidance every one of Zurich's 120 worldwide subsidiaries is required to research and recommend at least four areas which it thinks worthy of intensive cultivation. There is no constraint on choice, but within the overarching corporate framework they should be looking for one opportunity among private customers and one each from the categories of small companies, big companies and global corporations. It was that requirement which gave Zurich the infomation and incentive which enabled it to snatch a large and lucrative slice of multinational insurance from under the noses of sleepy, complacent rivals (many located in the City of London).

The eyes of Huppi, though, and his more alert opposite numbers on other insurance boards are no longer fixed exclusively on what is going on in the more cobwebby interstices of their own industry. They recognise increasingly both the extent to which its traditional preserves are being invaded by aggressive newcomers and outsiders, and the growing degree of disenchantment among actual and potential clients as they wake up to the size of their insurance bills and the availability of bargain-price alternatives. Here in Britain the erosion is already well advanced. But our Continental partners are only now experiencing the first chilly blasts (and in Germany's well-cossetted case, hardly even that). They are all going to find life a lot less comfortable from now on.

Take first the changing and ever more challenging role played by banks and building societies. Back in the halcyon days of 1989 just 14% (by value) of all UK life insurance was being sold across the counters of their high-street branches. But at that time this was considered more as a customer convenience than a source of significant profit, and most of the policies involved had been developed and packaged by the traditional insurance providers. The position is very different now. Last year the proportion of business done in this way had risen to 20%, and Lloyds, Barclays and TSB were all actively promoting their own branded products - indeed, the 60%-owned Lloyds Abbey Life now provides an extremely thick slice of the bank's entire annual revenue. Now that initial trickle is rapidly becoming a flood. Early in 1993 both Abbey National and National Westminster launched their own life offices and almost overnight established themselves as a serious presence. NatWest, indeed, joined the industry's top 20 within months.

Meanwhile, a clutch of the country's major building societies have likewise joined, or are in the process of joining, the do-it-yourself movement. Last autumn, in the most drastic divorce so far, the Halifax announced that it would be cutting its exclusive five-year-old link with the almost equally substantial Standard Life, and from the end of 1994 would go it alone. Leeds Permanent, in the same way, gave notice that it would be dropping its tied arangement with Norwich Union. Now it expects to be up and running with Leeds Life later this spring.

Nationwide, a bit further back in the queue, is busy 'reviewing' its arrangements with Guardian Royal Exchange (with a view to making significant changes later this year); Cheltenham and Gloucester (C and G), after some disillusioning experiences with endowment insurance has dumped its former partner, Legal and General, and opted to stop selling insurance in any form, and only Alliance and Leicester, among the top 10 societies, has opted, for the moment, to retain its current tied arrangements (in its case, with Scottish Amicable).

The arguments, in all cases except perhaps for C and G, are straightforward and stark. Insurance products, in most cases, are fairly simple to design. Banks and building societies have a reputation at least as persuasive and reassuring as most insurers. Their long-cultivated and largely captive customer base gives them a definite edge when it comes to distribution costs - a typical bank salesman, according to actuarial studies, can move 20 policies a month while his cold-calling colleague out in the street is lucky to shift five. They also have a clear advantage when it comes to absorbing items like training costs and showing customers a better deal over increasingly controversial commission charges.

Across the Channel, and especially beyond the Rhine, these developments are all at a much earlier stage - even though it was the French, with bancassurance and the Germans, with Allfinanz who provided the most common terms for what is being discussed. But they would not have remained immune for much longer, even without the July market opening, and once the new EC Directives take effect, the floodgates can hardly fail to open wide.

It is the (till now) well protected Germans who are likely to feel the chilliest draught. They may have invented the word for simultaneously peddling banking and insurance services but they have been slow to put it into effect. Scarcely 5% of German life insurance is sold across a bank counter and July's deregulation is likely to hit the comfy cartels with especially explosive force.What cross-fertilisation there has been so far has been mostly confined to fairly gentlemanly alliances. Allianz itself co-operates to some extent with Dresdner Bank and Bayerische Hypothekenbank (with both of which it has large cross-shareholdings) and Commerzbank sells an annual £400 million worth of cover on behalf of its 48%-owned insurance partner DBV. Other, more energetic atempts at co-operation have ranged from disappointing to disastrous - it was the decision by AMB, Germany's number-two insurer, to buy the former trade union bank BFG, in part to provide it with a tied outlet, that ultimately provided the means for two powerful French predators, Assurances Generales de France and Credit Lyonnais to establish major bridgeheads inside the German financial heartland. They could be the first of many.

It may take some considerable time before Barclays Life and Lloyds Abbey can establish themselves as familiar brand-names in the land of Deutsche Bank and Allianz. A much more immediate threat, on the non-life side of the business, comes from the low-cost direct-sellers of motor and now household insurance, such as Britain's Direct Line and Churchill. These have scored a runaway success in the UK market, where telephone quotes for standard auto cover are now typically undercutting the traditional suppliers by 20 to 30%. Direct Line, owned by Royal Bank of Scotland, and at the moment Europe's fastest-growing insurer, now serves one in eight of the UK's 12 million 'standard line' drivers, as a result of which, in 1992, its founder and chief executive, Peter Wood, became, notoriously, the country's best-paid businessman. He received over £18 million in annual salary, commission and bonus, before the Bank agreed to buy out his contract for around £42 million. And his ambitions are far from exhausted. He is already applying the same techniques to carve a slice of the routine house-and-contents market (where he accuses building societies, in particular, of committing 'a billion-pound burglary' when they quietly package such policies as part of a mortgage deal) and will soon be targeting the millions of 'higher risk' motorists and householders who find themselves either paying through the nose or unable to find insurance at all.

He is no longer alone, either. There is nothing particularly magic or unrepeatable about the Direct Line recipe and one only slightly smaller look-alike, Churchill, owned by Switzerland's Winterthur, already boasts 500,000 motorists on its books, and embarked at the beginning of the year on an attempt to repeat the exercise in Denmark. Both firms are poising themselves for a full-scale cross-Channel sales drive, and there are plenty of would-be imitators already waiting over there, ready to give the competitive ratchet a further wrenching turn.

Their time is ripe. It is not only Britain's Consumers' Association which finds insurance customers feeling fed-up, ripped-off and short-changed. Similar survey results are being reported in virtually every member country of the European Union. Any who can plausibly offer cheaper rates, swifter settlement, no-frills service is away to a head start. Those who cannot match that sort of performance - and no longer operate in markets where rules, laws, rates and tax treatment are designed to ensure that everyone survives - are liable to see both business and margins melting like snow. That sort of cull will become common as the whole industry is forced to make the adjustment from a seller's to a buyer's market. Many who fail to match Zurich's fast footwork or Direct Line's ruthless cost-pruning can expect to face bankruptcy, or collapse into the arms of a more efficient rival.

At least one well-known and previously successful operator has already identified this as a major opportunity. Sir Mark Weinberg was the man who originally launched the innovative and highly profitable companies which later evolved into, first, Abbey Life and then Allied Dunbar. Now he is busy launching a new and potentially very important venture, designed to capitalise on the vast restructuring excercise now getting under way. Its purpose is threefold. First, it will take over ailing life companies, if and when they no longer feel able to preserve an independent existence. Then it will staunch their costs by closing them to new business (thus simultaneously removing the need for both expensive sales forces and the heavy up-front commissions which motivate them). And finally, it will repackage their better products, shorn of their off-putting commission element, so that they can be effectively distributed by the 'bancassurance' organisations which he and his chief executive, David Beynon, expect will be handling up to half of all financial services business by the end of the decade.

Of course, the Weinberg assessment is very far from proven. The company which will embody it has not yet even achieved the dignity of a registered name, and Beynon expects it will be some time yet before it finalises its first deal. But it carries a plausible ring in a business where Peter Wood and Rolf Huppi are so clearly the names to watch. For anyone who does not like the direction in which the industry is proceeding the message is clear: take out some effective insurance.



Company Annual premiums*


Allianz 19.37

UAP 13.00

AXA 9.84

Zurich 8.57

Generali 8.46

Munich Re 7.11

Swiss Re 7.10

Prudential 6.79

ING 6.68

Winterthur 6.30

* 1992 Figures.

Source: UBS.

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