Changing the Guardian model

The champagne had barely stopped flowing at the Guardian Holdings (GHL) staff ball when the announcement came that the company would be closing its third office in less than a year.

Could the downsizing of GHL be the first in a long line of streamlining cuts, or should it best be seen as a unique case with a unique outcome?

Though the company has been forced to significantly revise its projected profits, it would appear that the GHL bubble is far from bursting.

The move to close the office at Kings Hill in Kent is the culmination of GHL’s strategy to consolidate its UK business, described by the company as “part of the ongoing review and rationalisation strategy programme which began in June last year”.

Both of GHL’s UK insurance arms, Zenith and Link, are being rebranded as GHL.

Termed operation Zink, the transformation of the two Gibraltar based and regulated companies began at the end of April.

Zink follows operation Spring, which entailed the closure of two of GHL’s six UK offices, and the loss of 90 jobs.

It is a remarkable turnaround. Only in April last year, GHL acquired the assets of ailing Rubicon Insurances’ Maidstone operations.

Troubled Times
The difficulty GHL now faces exemplifies the dilemma that an increasing number of insurers and brokers could find themselves in over the coming years.

There can be little doubt that the motor market, which constitutes the vast majority of GHL’s UK business, is continuing to perform below expectations, and is showing little sign of picking up.

GHL’s attempt to mitigate this has been to review and refine its products. In January, for example, the company moved into guaranteed asset protection (GAP) insurance.

Steve Tidd, GHL’s chief executive, described the move as “a significant strategic development,” limiting “exposure to the underwriting cycle, as GAP is not susceptible to the same pricing or competitive pressures as the private car market.”

“Most insurers have been cutting costs for a while. Mergers was one solution, moving products to EDI is another.

Grant Ellis - CE, The Broker Network

With its revised profit projections of £3.3m down from £5.4m, it would appear that the GHL business has indeed been susceptible. The company opted to raise premiums by between 5% and 6% in order to make up some of the shortfall, but could experience difficulties in holding volume as a result.

Grant Ellis, chief executive of the Broker Network, says: “Smaller insurers are caught between brokers on the one hand demanding higher commission, and falling premiums on the other.

“There is some inevitability about profits falling – particularly if your business is in the more competitive markets. Some insurers won’t be able to ride out the swings of the cycle. I wouldn’t be surprised if we see one going broke.”

While there are few signs of GHL’s business imploding (growth targets of £20m GWP have been set for 2007) redundancies will always remain a sensitive issue, and an ever looming threat.

Insurers are understandably cagey on the issue, but even the likes of AXA and Royal & SunAlliance have said that they would be prepared to lose staff if the circumstances required it.

In March, 500 staff at Aon’s UK reinsurance division were warned that they could face redundancies as part of a wide-ranging review of the division’s business model. The review was needed, said the company, to address changing market conditions and business processes, and the consolidation of insurers.

Then there is the move to electronic trading solutions, such as EDI, as a means of slashing the bottom line.

Cutting costs
“Most insurers have been cutting costs for a while. Mergers was one solution, moving products to EDI is another,” Ellis adds.

There is no doubt that with the move toward EDI, the need for staff to input and process data manually will decline.

So what is the future of manual trading personnel, like those who work at the condemned Link office in Kent?

A senior industry figure says: “Many insurers and larger brokers outsource this type of manual work to cut costs.”

“You need good people, and good people cost money.

Steve Carroll - MD, Markel UK

Stuart Reid, chief executive of Stuart Alexander, says: “We must get rid of the duplication of paperwork. It is a problem that technology can alleviate.”

The problem is that insurers and brokers still have a long way to go before electronic solutions will supplant the need for certain types of personnel.

Steve Carroll, head of Markel’s UK operations, says: “You need good people, and good people cost money.”

“There is a delicate balance between e-trading and people, and between specialist and general lines of business. It is the ground in between that insurers need to be wary of.”

Reid says the industries biggest failing is the lack of connectivity between brokers and insurers. “There are big wins if this can be achieved. But you have disparate software houses, each with their own interests. In addition to this, insurance and brokers have different and in some cases numerous legacy issues, so connecting them is difficult.”

That the Kings Hill development marks the beginning of a new trend toward centralisation is unlikely. Nonetheless, it is clear that smaller insurers face a real challenge when it comes to reconciling operating costs, technology and personnel.

The market remains optimistic that other areas of growth, such as risk management, could soak up some of the redundancies caused by developments in technology.

GHL for one hopes that up to 15 of the team at Kings Hill can be accommodated at the company’s headquarters at Haywards Heath.

“The rationalisation process is good news for brokers,” said a spokesman.

“Consolidating the product range and moving it on to full cycle EDI will help reduce their costs and improve overall service for their customers.”

In the meantime at least, the broker’s gain is the employee’s loss.

But that may soon change, as Carroll concludes: “We can expect to see a few more victims, a few more withdrawals from the market, and a few more takeovers.”