The trend setter

See also: Mayer sets 30% target

Norwich Union (NU) is justly pleased with its half-year results announced this week. The annus horribilis caused by the 2007 summer floods is now just a memory and the UK’s largest insurer is back on track with a 15% rise in operating profit to £326m.

For NU, soon to be rebranded Aviva, this is simply the beginning. Under its “One Aviva, twice the value” banner, the company has plans to deliver £200m of cost savings in 2008 alone. Ambitiously, it has declared its intent to achieve a market-leading expense ratio of 11% and is set to lead the market in hardening rates.

Chief executive Igal Mayer is determined to make his mark on the market. As reported by Insurance Times, he has taken a tougher stance on commissions for consolidators than any other insurance boss. He is also bringing small and medium-sized brokers closer, leaving him less exposed to the wrath of the consolidators.

The mantra now is “profitable growth” and NU, unlike many of its rivals, appears to be practising what it preaches. In general insurance in the UK, net written premiums have fallen 4% to £2.589bn for the first six months of 2008, which the insurer attributes to its strong ratings stance. In personal motor, NU has achieved rate increases of 5%, with 10% rises in household policies. In the fiercer commercial lines market, NU has achieved a small annualised increase of 2%, at the expense of some volume.

Mayer told Insurance Times: “Most, if not all, of the market is not pricing to an adequate rating level today and that’s not sustainable. We are trying to inch rates up right now and if that means we will have to sacrifice some volume to do that, then that’s what we will certainly do.”

This is tough talk. But this week’s results show that NU can make money while pushing up rates. Moreover, they show that it really is willing to give up volume, and that this message is filtering through to the underwriters on the ground. This is particularly impressive in the current economic climate.

As Mayer said: “Given the general economy, we would describe our results as a very solid performance. I said jokingly to someone today, ‘Solid is the new black’.”

NU’s global scale has helped to provide that solidity. In Asia, for example, a rapid growth in life insurance has helped the company to weather the storm in Britain.

Significant rise

The 2% rise in rates for commercial lines may be small, but it is significant because the company sets the trends that the rest of the market follows. This holds true for its approach to the consolidators, too. While there have been mutterings among insurers for months that the commissions being demanded by consolidators – sometimes as much as 50% – are unsustainable, Mayer was the first to say publicly he would rather lose business than pay sky-high rates. He has proved as good as his word and is now locked in tough negotiations with the major consolidators.

While he refuses to talk about individual relationships, he will say: “Some of the commissions that are being charged or asked for in my view put us in an unsustainable position as an industry. When you are looking at commission levels of 35%-40% and you add on insurer costs of 10%-15%, you don’t have to be a rocket scientist to figure out that you can very quickly get to 50p of every pound of premium revenue. I don’t think that’s a fair deal for consumers, that 50p of every pound goes to the coffers of the distribution men.”

“We have 3,000 brokers and I want them not just to survive here in the UK, I want them to thrive in the UK.

Igal Mayer

For the first time, Mayer has named his target figure for commission levels in commercial lines. “A sustainable model in commercial is a number of around 30%, I think that’s good value, and that certainly is what we are targeting. In our traditional broker force, we believe the current commission levels are just fine,” he said.

Some consolidators would beg to differ. Having based their business model on the assumption that acquiring brokers gives them the scale to leverage commissions, they will not take kindly to Mayer’s attempt to drive down their remuneration. In fact, given some of NU’s more widely publicised troubles of late, some are asking if they are paying for the insurer’s mistakes. NU has recently become embroiled in the collapse of property company Dawnay Day, to which it had lent £650m, and its life business has had to hand back up to £1bn of its “with profits” fund to policyholders.

As the chief executive of one major broker put it: “Why doesn’t it get its own house in order before taking a crack at brokers? Norwich Union has come out fighting on commissions, but how much is it looking to save? Are we paying for the mistakes made elsewhere in the business?”

This point of view is backed up by Citigroup’s analysis of NU’s results. It warns that cost savings could be swallowed up by rising commissions and shrinking premiums. While pricing remains weak across the market, this puts NU under pressure. And Citigroup warns that, although NU may seem fairly comfortable now, its position could deteriorate next year.

Clearly, the relationship between the UK’s largest insurer and its biggest and most powerful brokers has, in some instances, become a little strained. Clever of Mayer, then, to ensure that the business is closer than ever to its life blood of small and medium-sized brokers. “Norwich Union and all its predecessor companies for 200 years built its success on the strength of independent brokers – brokers are our friends,” he said.

“We have 3,000 brokers and I want them not just to survive here in the UK, I want them to thrive in the UK because their strength has been our strength.”

Financial backing

To this end, Norwich Union has offered medium-sized brokers a range of support, including financial backing, through its Club 110. It is preparing to go one step further and offer enhanced support to the smallest brokers, particularly in the compliance arena.

This is likely to be well received by smaller brokers, but some may feel the higher commission levels enjoyed by their bigger brethren would be a better reward. As one senior market source said: “What is funny and can be completely overlooked is that most brokers in the UK get nowhere near 30%. When this figure is bandied about, they can feel disenfranchised.”

As Insurance Times reported last week, Bob Beckett, a well known figure in the industry, is set to play a leading role on behalf of NU. “Those small independent businesses are struggling to cope with the regulatory burden and Bob and his team can, in many ways, help brokers fulfil their regulatory obligations,” said Mayer.

Norwich Union will continue to make the headlines as it comes to terms with consolidators, moves closer to smaller brokers and fights to push through rate increases.

This week’s results show it still has the financial stability to lead the market – and the strength of its leadership has never been more evident.