Direct Line aims to reduce expense ratio amid business transformation

Direct Line is continuing to transform its business after launching its strategy last year.

Its objective is to achieve a 20% expense ratio by the end of 2023 and reduce its operating expenses by £50m by 2021.

The insurer reported a drop in underwriting profit due to lower reserve releases than the previous year.

As well as motor taking a hit as its operating profit decreasing to £302.6m last year while in 2018 it was £418m against the backdrop of a challenging motor market post-Ogden.

It follows the group axing 800 jobs as part of its digital transformation drive – 300 of which are employed at its Ipswich office.

Tim Harris, chief financial officer at the group told Insurance Times: “The announcements we made last week are part of that but by no means all of it. It gives you an idea of work we are doing to remain competitive and manage our customer base.

But Harris said there had been some real progress in relation to the business’ transformation.

Chief executive Penny James pointed to prior reserve releases dropping primarily due to Ogden, although this lower reserve release was in line with its expectations.

“In particular we are seeing the effects of some of our reinsurance buying claims through. We changed our reinsurance programme several years ago, and it takes a while to work through the way that impacts on the current year – prior year releases,” Harris said.

”We are expecting the proportion of prior year releases relative to current year profits to continue to reduce over time but there is nothing here outside of what we are expecting.” 

Direct Line is seeing the results of its investments in various technologies coming through. He gave the example of Darwin – the group’s comparison website proposition, as well as the platforming of Direct Line’s motor business.

The growth of the group’s brand Green Flag over the course of the year saw a 40% increase in policies breaking the one million mark in Q4, as well as its direct commercial line business doing well.

People are key

Meanwhile Harris added that people are key to the business’ transformation pointing to the launch of the group’s share buy-back scheme of up to £150m which it plans to complete by the end of July 2020.

“We are delighted to be able to announce that we are giving all of our employees £500 worth of free shares. I think this is a very positive step to make sure they benefit as shareholders in the business,” he added.

Claims inflation

James told Insurance Times that last year the motor market was challenging on pricing, but she is “modestly optimistic”.

Direct Line started putting claims inflation through [to premiums] and because other players in the market were not moving it lost a little volume in the first half.

“Obviously things have improved in the latter half of the year. It feels as though there’s an inflation going through the market,” she said.

When asked why its claims inflation was 3-5% and lower than its competitor Hastings, Harris added: “There’s no doubt that severity was at the top end of our range, certainly in 2019 we saw some improvement in frequency. That compares to 2018, which ironically because of the good weather was quite a high frequency for motor insurers.”

In relation to the recent storms Ciara and Dennis, he cited that out of 8,000 claims, 95% of these were storm related.

But he said that Direct Line has “unique business model” and therefore advantages in the way it operates the claims general insurance side of its business.

For example, Direct Line owns 21 claims repairs centres making it the second biggest repair franchise in the UK. It repairs around 100,000 cars per year – half of the accidental damage claims from its policy holders.

“That gives us the opportunity to directly manage the cost of those damage claims – [and] it gives us an immense insight into changing trends in accidental damage within the motor industry.

Harris stressed that this was an important differentiator and helps keep its claims inflation under control.

Coronavirus claims

Harris said that in relation to the Coronavirus, it is used to dealing with difficult circumstances.

He said that it has seen around £1m worth of claims mainly relating to cancelled holidays for areas that the Foreign Commonwealth Office said that people should not travel to.

Direct Line has about 3.6m enforced travel insurance policies mostly sold through bank account package deals via NatWest and Nationwide.

“We are well prepared, we have good reinsurance protection in place in relation to the travel insurance business we write. We are also monitoring the impact on us operationally and we are monitoring the guidance that the government is putting out, and we are thinking about the potential impact on our asset portfolio.

”All of those we feel are under control and well within our risk appetite but we are not at all complacent about this. We are making sure that we are monitoring the situation as it develops,” he said.