In the first of three features on the effect of merger and acquisition activity on a company's most prized possession – its staff – Brian Hanney looks at why they must learn to live with the growing trend

The insurance industry – like many other important UK employers – has seen a frenetic spate of merger and acquisition activity in the last decade as companies attempt to build up their muscles to fight in the worldwide arena.

"Globalisation" is the key. If British insurers cannot get together or "consolidate", they will suffer a mauling at the hands of the giants stalking continental Europe, Japan and north America.

Just this year, we witnessed the joining up of CGU and Norwich Union. CGU is itself the result of a merger between General Accident and Commercial Union in February 1998. And NU, some eight months after that, went on to swallow up ITT London & Edinburgh.

There are many other examples of these corporate marriages, notably the merger of Royal and Sun Alliance to form a group of that name. Last year Axa went to bed with Guardian Royal Exchange and Lloyds TSB, primarily a clearing bank, sniffed out an insurer in the shape of Scottish Widows. According to the Association of British Insurers, this trend "will continue for the foreseeable future as companies consolidate and seek new markets".

Mergers will inevitably have an effect on staff. Companies may go for "horizontal" integration, where two firms with an identical market – say two general insurers – decide to join up. Vertical integration, on the other hand, is where a company takes over all stages of a product. An insurance company may, for example, wish to control not only the underwriting but also the marketing and distribution channels of a product. You may see an insurer buying a chain of IFAs. By increasing their size, companies hope to achieve economies of scale, which means that costs fall while output increases. This could affect several areas of a horizontally integrated company and inevitably effect staff numbers.

There is also the problem that as a company grows, relations between managers and employees may become increasingly impersonal and processes become more bureaucratic. Technology is also an important factor in a merger. Direct insurers need to access customer information quickly. This means you need large and expensive computer systems, which large companies can afford more easily.

But globalisation will continue to be the main driver of mergers. Surprisingly, UK insurers are relatively small compared with the US and Japan. It gives companies the chance to move into markets abroad, where otherwise they may be facing closed markets. For example, licences to operate in China have been granted to RSA, Allianz and Axa-UAP.

However, despite the high numbers of mergers, the number of insurance companies is showing no great decline. In 1986 there were 675 general, life and composite insurers, while in 1997 that had slipped to just 672 – mainly a result of new entrants to the market, notably retailers. The ABI say there may be polarisation between large companies and smaller niche players.

So what is the position of staff in mergers? And what about those considering entering the industry? It is reckoned about 10% of jobs disappear in a merger. When Royal merged with Sun Alliance in 1996, it announced 5,000 jobs losses. When Commercial Union merged with General Accident, there were 3,000 redundancies in the UK alone. According to MSF, the union that represents many insurance staff, "mergers invariably involve huge job losses, often on a massive scale, with the potential to inflict huge social damage".

A new merged company will also have to tackle the problem of welding departments and staff who may feel they have little in common with each other.

But there are also solutions and both management and staff must find ways of making it work.