'Geddes must convince the City that DLG is spot on with its reserving'

NIG’s decision to consult on 90 redundancies and shake up its back-office functions should have several outcomes. First, it should help NIG reduce its expense base (see page 6). The commercial combined ratio of Direct Line Group (DLG), of which NIG makes up the bulk, was running at 112.7% at the half-year stage in 2012, nine points worse than in 2011. That’s not particularly out of kilter with rivals’, but NIG released £58m of reserves at the half-year stage, up on £31.7m last year. This can’t be sustainable long-term, so NIG has seemingly decided to cut costs rather than put up prices.

Secondly, by putting the back-office and support in two big centres and leaving underwriters in the regional offices, it is following a similar business model to other insurers. When NIG boss Jon Greenwood talks about giving more authority to underwriters in the regions to trade, read Aviva and AXA. Service to brokers does not necessarily have to suffer, but brokers with memories of previous office closures will be watching closely.

The responsibility for all these decisions sits with DLG chief executive Paul Geddes. He has leadership qualities in abundance, has appointed some good people and has a plan to make the business a highly efficient, low-cost operation that can lock horns with the best on pricing and deals. It’s an impressive turnaround from the troubled company he took over in 2009: so far, so good.

Now Geddes must convince the City that recently floated DLG is spot on with its reserving. The company released £228m reserves at the half-year, which improved the combined ratio by 12.3 percentage points.

There are still trouble spots out there, such as the tailing off in private motor rate rises, the ever-increasing cost of periodic payment orders and market-incurred claims inflation for third-party damage last recorded at a worrying 12.5%.

Geddes will have to continue to show prudent reserving and that the days of heavy reserves deterioration are over.