Staying afloat

There’s always something slightly depressing about being back at work after the festive period. This time around there’s also the spectre of a recession. The economy is set to contract by 2%, credit availability is at an all-time low and most experts are unwilling to call the bottom of the recession until the end of 2009. So what’s been the response from the general insurance industry?

While we haven’t had the carnage of the high street, nor the rapid retrenchment of the banking and capital markets’ businesses, insurance companies are braced for deterioration in claims performance. With staff costs representing at least 60% of the expense base, there is now a weekly flow of announcements covering tactical (the closure of branch x) and strategic initiatives (restructuring, outsourcing, product exits).

Speculation about mergers, acquisitions and strategic alliances is rife as businesses try to sustain shareholder value. Over the next year, rising claims inflation and falling investment return will mean more of the same, with the prospect of more significant announcements if the recession extends well into 2010. But despite the difficult trading conditions it need not be a case of “shrinking to greatness”. The last recession and lessons from other industries show there are complementary strategies for growth alongside retrenchment.

I’m reminded of the old story about the two hikers in a forest. They both see a bear starting towards them. One hiker calmly sits down and puts on his trainers from his rucksack. The other points out that bears on four legs can run at 25mph offering no prospect of escape. “But I’m not trying to outrun the bear,” says the first hiker.

When you look at your competitive position in your market, look also at the relative position of your competitors. Who are the players who have only a few policies or a smaller share of the business or panel? Do they offer something that is really different? In this market – and at this time – there is the opportunity to pick up businesses from smaller or fringe players and consolidate your position. It sounds aggressive, but against this backdrop of uncertainty, human nature tends towards a flight to quality. Are you the bear? And if not, are you the one wearing the trainers?

To fully appreciate the growth opportunity, you need to understand how the recession will affect the behaviour and economic activity of your customers, particularly how they will expand and contract.

Ernst & Young ITEM Club, the economic think tank, has shown that while economic activity in construction, motor trade and retail will shrink, other areas (agriculture, healthcare, government) will be more resilient. Therefore, it is worth exploring the potential to refocus broking and underwriting activities around these segments.

The insurance industry is rarely held out as “best in class” in product up-selling and cross-selling. However, there is a big opportunity to sell extra or related covers in personal and commercial lines. This could be “income protection” or “key man” products for a small and medium-sized enterprise (SME) customer with a small commercial package contract, or extra multi-product discounts for personal line customers.

A surprising amount of easily accessible customer data that propensity models can be built upon is available on existing and potential customers. Carefully directed multi-channel campaigns or selected outbound calling to existing customers can generate significant short-term revenues. These tactics can be on a direct basis or provided as part of a sales and marketing “tool kit” to selected distributors by the insurers who have built the capability in-house.

A recession also means increased customer turnover. They resent rising insurance premiums when prices are falling on the high street. Few businesses, especially smaller distributors, appreciate the “embedded value” of the existing customer base. New business costs have been paid, the customer knows the product and loyalty will be building. Insurers, and especially brokers, need to adopt a “refuse to lose” mentality on profitable customers by establishing specialist retention processes and teams.

In 2007, the UK general insurance market generated more than £40bn. Over recent years, the large number of independent intermediaries has substantially reduced barriers to entry, allowing insurers to reach more than 80% of the commercial market and 50% of the personal lines market. There is a real opportunity for companies to extend their products and customers into new, more profitable areas. For example, there is potential to diversify within the £10bn SME market or large client opportunities in the £5bn mid-corporate market.

Without doubt the year ahead will be difficult. For all businesses, the immediate priorities will be expense management and careful allocation of capital. But to merely survive or to prosper during the recession will be determined by the ability to generate growth while simultaneously responding rapidly to those opportunities presented by a volatile marketplace. I suspect the industry landscape will look quite different this time next year.