The foreseeable future

This time last year, many predicted the long-awaited hard market would finally arrive in 2010. Private motor may have bounced back but, much to the disappointment of under-pressure brokers and insurer bosses, the rest of the market remained soft.

So what’s in store for 2011? Insurance Times has brought together leading industry figures to play fortune teller, offering their three top predictions. Overall, it looks like there’s still pessimism over rate rises, we need to get ready for mergers and acquisitions, and also watch out for the collapse of a broker network. 2011 is going to be an interesting year.

Brokerbility chairman Ashwin Mistry

• More insurance products will be traded online

• Insurers will look to take the pen back from MGAs

• More employees will move between firms

“2011 will be a very challenging year on so many fronts. It is quite daunting. Rising inflation, coupled with the prospect of high interest rates and increasing commodity prices, will make both individuals and companies consider more options than ever to manage their budgets.

“More and more products will be bought online as more products become packaged.

“Solvency II will hit some insurers quite hard, and managing general agencies (MGAs) will be under scrutiny, with insurers taking back the proverbial pen.

“We have witnessed a lot of volatility in people moving around between banks and retailers. This is a direct result of companies’ fears of losing market share or even their current positions. Our sector is starting to see some turbulence, and it has only just begun.”

Cooper Gay Swett & Crawford chief executive Toby Esser

• There will be no great push for price increases

• We’ll see increasing consolidation of business in broking and underwriting

• Solvency II won’t impact the market in 2011

“I don’t see any big change unfortunately. We’re in the same marketplace this year. I see no great signs of the market getting harder or things improving. From what we can see, there is generally a profit being made by the insurance companies. If that’s the case, then I don’t see anyone pushing for prices to go up.

“I think this market will drive a little bit more M&A. We’ll see a few more people disappear and a bit more consolidation on the broker and underwriting side. In terms of people moves, there will always be some casualties. One of the first things that is usually done in a merger is to replace senior management.

“Solvency II won’t have a huge impact next year – we won’t see that until 2012. I think Solvency II continues to change the capital bases of businesses and affect the costs that they’ve got. Again, this will drive more mergers and acquisitions.

“For anything big to change, there would have to be a huge individual loss. I just don’t see the sustained individual and attrition-type losses having an effect. Not for a long time yet, anyway.

“Oh, and Chelsea will win the Premier League.”

Hardy chief executive Barbara Merry

• Prices will soften, but shareholders will start wanting returns

• An increase in mergers and acquisitions will be brought on by Solvency II

• We will get a new Lloyd’s chairman

“2011 won’t be very exciting, I’m fairly sure. We’ll see very difficult market conditions in most lines of business. On pricing, the general backdrop is that there is just too much capital around.

“There is a public perception and investor perception that insurance isn’t a very thrilling place to be. But we have good capital and what I rather suspect is that we will see a softening in pricing. My sense is that shareholders are getting a bit more vocal about the insurance cycle themselves. They understand the danger of insurers having too much capital and I think they will be much more vocal about wanting money back.

“We’ll start to see the strain of Solvency II on businesses. I think that will take the form of some companies saying: ‘Even though we have enough capital, I don’t think I can cope with the infrastructure required to address Solvency II.’ They’ll throw in the towel and put themselves up for sale.

“My third prediction is that we’ll have a new chairman of Lloyd’s to replace Lord Levene.”

Broker Network managing director Nick Houghton

• A well-known network will collapse and insurers will look to pull out of more networks

• Commercial rates will come under even more downward pressure

• Start-up brokerages will increase

“I predict that 2011 will see the collapse of a well-known network, but I’m naming no names! It will see existing members leave and will struggle to find new members to fill the gap. I think we will also see more insurers pulling out of networks where they feel costs outweigh benefit. Only the networks that can show true value to brokers and insurers will survive the next three years.

“The number of start-up brokers will increase next year, which will be good news for our start-up proposition. I believe demand will increase by 50%. I also think Broker Network and Countrywide will find it easy to secure new members. 2011 is shaping up to be a record year for us.

“Commercial rates will come under pressure as insurers start to compete for top-line growth. This will definitely be a market to watch.

“As brokers demand better service from insurers, and Broker Network members step up their trading efficiencies, I think our network trading room will be writing over £1m every month by the end of 2011.”

Beachcroft head of strategic litigation Andrew Parker

• Alternative business structures for law firms will create new challenges for insurers

• The Jackson Review will be fully implemented

• There will be greater streamlining of claims processes

“We are going to get alternative business structures (ABS) next year, which means that ownership of legal services, currently restricted to lawyers, will be open to other providers. It is quite unclear what the impact will be. I don’t know what the regulatory framework will be for those structures.

“ABS will create an opportunity for legal services to be sold or provided in different ways. That is likely to result in competition for legal expenses insurers. It is also possible that claims management companies could see this as a new opportunity. It may allow them to introduce business in a way that doesn’t have any restriction on referral fees.

“I think the full implementation of the Jackson Review is a probability rather than a possibility, because the combination of Lord Young’s report and the government’s consultation of the Jackson recommendations has given it a big push.

“As a result of the proposal by the government that the RTA process should be extended to other type of claims as well as motor claims, we are going to see a further streamlining of claims processes.”

AXA claims director David Williams

• Employers’ liability trigger case to be appealed

• More credit hire firms will fall by the wayside

• The government will consider a more balanced approach when reviewing the discount rate for personal injury damages

“We still have a situation where sufferers of mesothelioma die before receiving compensation. We will see better co-operation across the insurance industry and government organisations to come up with a solution. Everybody now recognises that there is a huge problem, and I think this year’s employers’ liability trigger judgment will be appealed in the Supreme Court.

“I see less credit hire and more direct hire by insurers. I see at least one large credit hire organisation ceasing to operate and more insurers getting to grips with providing replacement vehicles on a direct hire basis at a much cheaper cost.

“I would like to see a review of the discount rate to replace the current mechanism where rates are just linked to government gilts to create a more balanced basket of investments. No seriously injured person takes a lump sum and invests it entirely in gilts, so why are calculations for arriving at the appropriate sum based solely on returns from gilt investments? If we move to a situation where rates are not just linked to gilts, there would be less concern about whether the current discount rate is appropriate.”

GAB Robins chief executive Kieran Rigby

• There will be more consolidation in claims

• The focus on indemnity spend will increase

• Insurers will become more cautious of ‘big’ partners

“There is still a large degree of fragmentation in the claims outsourcing sector, and some private equity companies want to see better returns than they have seen from their investments. We may see a big standalone sale but I think the ground is fertile for consolidation. There are rumblings that private equity owners are having a sniff around the market.

“There will continue to be an enormous focus on indemnity spend through the continued investment in fraud-related or counter-fraud activities and tools, as well as managing leakage. A number of insurers are investing heavily in claims-related technology and that will change the shape of how loss adjusters engage with them and what services might look like. With soft rates in the commercial property market, indemnity spend will become a critical focus.

“In addition, the demise of Rok, the withdrawal of Homeserve from the market in 2010, and the demise of the Connaught Group will cause insurers to look at the companies they are partnering with and realise that big is not always best.”

Bluefin chief executive Stuart Reid

• Heightened regulation is coming your way – be prepared

• No one really knows what is going to happen to rates. All we do know is that we don’t know

• Re-engineering your business for these testing times is an imperative. Stand still and you fail

“Regulation in its different forms is going to get tougher for many in the industry. More invasive, more costly, more far-reaching. Risk, and how you manage it, security and what will be demanded, adequate resource, both financial and non-financial, will all be scrutinised ever more closely, and practices that were acceptable – even the norm in the past – will have to change, and fast.

“The economic threat of the ongoing soft-market, combined with a very fragile economy, will continue to have an impact. Add the actions of certain insurers repairing their top line, and the future, certainly for premium, and its effect on claims ratios, will mean that commission in all its forms will once again be very much in the spotlight.

“It’s not all doom and gloom: opportunities for those who take tough decisions, give the client what they want instead of what we think they want, and who are prepared to re-engineer their business to be fit for these times should do very well in a market where choice, in most areas, will reduce.”

CCV chief executive Michael Rea

• M&A activity will increase as more brokers look to exit

• There will be increased use of e-trading for commercial SME products

• Commercial rates will harden in the SME space

“A large number of the UK’s 3,000-plus independent brokers have reached the stage where they’re thinking about succession and exit planning. We will see more brokers looking to sell part or all of their businesses this year.

“I expect more businesses to get back on the acquisition trail, having sorted out balance sheet and capital issues. Brokers will need to think carefully about who they work with to help manage their exit strategy: my advice is to look for someone with a flexible approach, ready access to capital and a good track record of successful acquisitions.

“Turning to commercial insurance, we’re going to see more e-trading as these products become increasingly commoditised. Platforms like PowerPlace will gain real traction in 2011. And rates will start to harden. There was a lot of talk but little action on rates last year. I think that will change in 2011.”

Jelf Group group chief executive Alex Alway

• Uncertainty around the economic climate will continue and the insurance world will respond, showing why it should be considered separately from the banking industry

• With the sunset of one regulator and the rise of another, it will never be more appropriate to engage in dialogue with the new team

• Brokers who are close to their clients will prosper; client focus matters in 2011

“In a tough environment, there’s never been a better opportunity for us as a profession and an industry to display what we are good at, which is to create opportunities and offer good advice. I don’t see any rate increases for the first half of the year at the very least.

“But the biggest issue is not so much the rate increases, it’s the overall coverage. In the mid-to-large sector, they are still under attack. We might see some slight rate increases, but the reality is that’s more than offset by premium reduction.”

Miller Insurance Services chief executive Graham Clarke

• The buyers’ market will prevail: with good cover as well as good prices

• There will be more M&A among both insurers and brokers

• Solvency II will challenge smaller insurers and captive owners

“It is a very good time for buyers. From a UK retail perspective, I don’t see any change to that in the next 12 months, so there is a good opportunity for clients to not only negotiate a good price for their insurances, but also a good time to improve coverage.

“There will potentially be more mergers and acquisitions on both the insurer and broker front throughout 2011. Because of the environment we are in, it is very difficult for brokers to grow their business. Publicly quoted companies will be very tempted to look for acquisitions.

“Equally, there are pressure points on the carrier front. We have seen some M&A activity there in 2010, certainly within the Lloyd’s environment, and my expectation is that we will see more of that.

“Another challenge for 2011 is Solvency II. Most insurers are very well prepared. The greater challenges lie with smaller insurers and captive owners, who are going to have to consider very carefully how they manage their captives going forward.”

Barbican chief executive David Reeves

• The market will go very soft

• Lloyd’s businesses will try to get the bulk of Solvency II work done next year

• Claims inflation will continue to tax the industry

“I think the market is going to go very soft. We have been encouraged by Lloyd’s not to grow next year. We are maintaining our capacity at the same level because we don’t see any big opportunities emerging or new classes that are interesting to us at the moment. We are going to batten down the hatches, write our existing book, try not to knock over any skittles and survive the year in good shape.

“It is a excellent opportunity in a soft market to work through what Solvency II means for individual businesses and the market as whole. All Lloyd’s businesses will be taking it very seriously and making an attempt to break the back of it during next year and be ready for any new hard market that might emerge.

“It is also a good time to buy businesses. Valuations are low, investors have only got a short fuse and they like to see things done. I think there will be some substantial transactions done and a lot of activity in that area. A couple of them haven’t come off so far, but I think overall quite a high percentage of deals will get done in 2011 and 2012, and we will have a more consolidated market.

“Claims inflation is a concern. During a recession, claimants come forth expecting more, and there is a very real level of claims inflation, particularly in the bodily injury side and the employers’ liability side that we need to be on the lookout for. I don’t think it is going to be plain sailing for claims departments.”

RFIB chief executive Marshall King

• A soft rate environment will continue in general

• There will be more underwriter M&A and withdrawal from business lines

• Smaller brokers will feel the pinch and the urge to merge

“The biggest issue at the moment in the London and Lloyd’s market is that rates are generally low across the board, with a few exceptions such as energy and motor.

“Allied to low rates are low investment returns. Companies can’t make up any shortfall in underwriting on the investment side. Underwriters are pulling back from writing risks at unsustainable rates and we are seeing that in the Lloyd’s capacity plans for next year.

“The only way for underwriters to grow is through acquisition. There have been some recent moves in that direction and there will probably be a few more.

“Brokers are feeling a lot of the same effects. While the big four brokers are fine and will ride through it, some of the smaller players that don’t have a particularly strong position in any of their niches will face issues, and I think there will be consolidation in the smaller Lloyd’s and London broker market. Some of the smaller firms will be forced to seek bigger partners to achieve sustainable profitability.”

Biba chief executive Eric Galbraith

• Insurance sector will campaign for fairer regulation

• There will be a review of the FSCS and greater recognition of the insurance sector

• We will see incoming reforms from Lord Jackson and the Law Commission

“2011 will be another interesting and challenging year. Much has been said about the difficult economic climate, the soft rates and reducing margins, but with changes in technology, medicine, climate, the law and many other areas, risks for individuals and businesses are not diminishing.

“There are, therefore, many opportunities in 2011 for our sector. Regulation will remain Biba’s top priority, with our sector coming together to demand (and hopefully achieve) more appropriate, proportionate and cost-effective regulation.

“We will also see the review of the FSCS (Financial Services Compensation Scheme) and separation of our sector from those whose main business is not insurance intermediation. In 2011, we will see the FSA (because it will still be in place) focus on client money and, as a sector, we need to address this issue.

“These challenges will, of course, be backed up by Biba’s well thought out, constructive arguments on better regulation.

“Other big developments in 2011 will include the introduction of continuous insurance enforcement, the argument developing over flood protection and the ongoing reforms from the Law Commission and Lord Justice Jackson.

“Biba will be working with members to protect their interests and make it happen!”

Alistair Hardie, managing director, speciality insurance, FirstAssist Insurance Services

• The market will finally realise that travel insurance is too cheap and see some realistic price rises to deal with the inexorable rise in claims costs and increased fraud
• On-line distribution of small business insurance will start to take market share
• The Coalition Government will wake up to the fact that taxing entrepreneurs and those who create jobs and wealth is not a recipe for stimulating economic growth

Hardie said: “Axa has already talked about the need for double digit rises in the travel insurance market and I wholly support that view. The growth of comparison sites and the increasing availability of travel insurance have put downward pressure on premiums. However, double digit inflation in medical expenses in markets such as the US, is pushing up claims costs significantly. There has also been a rise in baggage and money claims putting further pressure on claims costs. Premiums have to rise if the market is to remain sustainable for those involved in it.

“I think next year will also see the online channel break through as the medium for small business insurance sales. The depressed economy is forcing small firms to look for the most cost effective way of buying cover and improvements in IT are making the online purchase easier than ever. Both of these factors point to the internet becoming the medium of choice for small businesses buying insurance.

“Hopefully these small businesses will not be hammered any harder by the Coalition Government as it is they that will lead us into the next economic upturn.”