Cut the rhetoric: the recession is here

Today, an underlying product has literally no value. But if the advertising is cool, hot, wicked or the dogs!! who cares? If it becomes a must have, that’s all that counts!!

Insurance has been commoditised to the point where it I now an utterly devalued product. It is hard to convert it into a 'must-have', save for the areas where there is a legal requirement. It has as an industry been operating to rules clearly from la la land (see the FSA).

We have heard over the last year everyone trying feverously to talk up underlying pricing, but when push came to shove, Insurers appear to have bottled out, if not directly under the auspices of ‘price matching’ then via their ‘direct ’or ‘white labelled’ routes.

It’s not good business and pretty shallow practise, because they then sought to blame their discounting on everyone else.

Now with the economic outlook shifting distinctly down, what will happen to the pricing models of the great and the good, or will our illustrious Insurer Grandees play Canute?

I raise this question because banks have felt they had buck passed their risk through repackaging garbage onto their clients; many of whom were no doubt insurance companies. But when the music stopped, save possibly for LloydsTSB, their overzealous practises returned to kick them in the teeth and stop the party dead!

Banks are a prerequisite of any economic system and they went pleading to the Govenor asking for extra liquidity. He initially said no, then back tracked when the extent of their madness became more apparent.

“Insurers cant afford to subsidise through reserves any more, have no taxpayer to bail them out, and the market wont pay up. All in all, a pretty poor scenario.

That’s what happens when you have so much off balance sheet to save your neck: you effectively enter into absolute denial both to yourself and your regulators.

They raised cash to square off against what, they said, was needed but that was then and this is now so who knows what other googlies they will chuck at us.

Insurers on the other hand had the reserves but have been raiding them for so long the coffers can’t deliver, asset prices and investments have fallen and we still don’t know who has sub-prime packaged exotic goodies hidden away by the billion.

Insurers can’t afford to subsidise through reserves any more, have no taxpayer to bail them out, and the market won’t pay up. All in all, a pretty poor scenario.

Having played both Bull and Bear markets for 24 years, the one thing that sorts the men from the boys is placing your bets before the herd shifts and reversing out in time.

It meant never hitting either the absolute top or bottom but, most importantly, leaving the end party without cause to complain.

Here the only solution for Insurers in the present quandary is to return to basics; something they appear unable to do believing 50 varieties of the same thing is what the customer wants.

“If [Insurers] are prepared to cut their own rhetoric and accept the recession is here they will cope well.

They just need to stop discounting against themselves, it’s that simple. Some will say this will cost the end Client. I say no way, because it will bring a far better mean basis and substantially less confusion. Buyers will stop playing off the same companies against their own subsidiary prices because they no longer exist.

Prices will not go up, but more importantly, they will not go down, and the ability to make money will still be there for all in the system.

The key is that this will be totally contingent on Insurers being prepared to look outside the box now, before it becomes too late. If they are prepared to cut their own rhetoric and accept the recession is here they will cope well.

Taking that route will basis change their horizons and open a new profitable chapter. Of course if they don’t, I can’t quite remember how long Canute actually lasted.

Robert Marshall is Director at Trident Insurance.