Guest blog: John Sims

The public outcry and media furore surrounding the banking world has led to a feeling among some in insurance that the storm clouds are, by enlarge, bypassing our industry. There is also the feeling that the credit crunch has actually done us a favour by elevating insurance from the bottom of the heap.

While these views are not without merit they have been formed during a sustained period of bad news. They are therefore a bit on the optimistic side. Granted this does seem to be a high water mark for how the industry is perceived in comparison with banking. However, in these volatile times that could all end in a heartbeat as the industry is at risk of the kind of shocks that have seen banking get a public mauling.

While we in insurance may like to think we are getting away with it, the reality is the effects of the credit crunch have in some cases forced some UK insurers to take drastic action. Make no mistake, right now many insurers are grappling with issues that threaten their very existence. It is entirely possible that a UK insurer may yet fall over. Before you even get into the state of some insurers balance sheets, and the stock market reaction to their dabbling in the subprime debacle, at the heart of the problem lies a model that, to put it bluntly, is now flawed financially.

In this current economic climate investment income cannot make poor results respectable. Farewell to the era when combined operating ratios of 105% were not a problem because investment income would bring them down into the 90s. With the stock market in tatters and interest rates at a historic low, many insurers are having to retrench. In part this means pushing through rate increases but this is failing to stop their retention rates from sliding while the newer players, unburdened by legacy issues, mop up.

The other drastic measures some insurers are engaging in are large scale job losses. This is not about streamlining the service to make them leaner and more effective. Indeed it is hard to see how service can possibly improve with a reduced workforce so service will suffer even more. There is also a limit to the number of jobs insurers can outsource and offshore. Given the poor reception and media coverage this has received to date, I doubt whether further announcements would go down too well so I would suggest they have already reached that limit.

One major area where an insurer could save money is the amount the pay out in claims. Already rumours are circulating about adjusting companies that are being targeted on reduction of claim quantum. If true, this is about as far away from TCF as it’s possible to get...

So despite the common view that the current economic turmoil is mostly affecting banking, many insurers are having to make radical savings in their outgoings to endure the crisis. No doubt the vast majority of insurers will survive but at what cost to the customer? It’s not a question of if it gets bad for the consumer; it’s a question of when and to what degree. I think it is a great shame that the opportunity to seize the moment and genuinely improve how insurance is regarded, in all likelihood, will be squandered because many insurers are wedded to a model that is not effective in this current climate.

John Sims is chief executive of Lorega.