Tony Cornell says the mega merger between CGU and NU will be bad news for brokers.
CGNU have now issued full details of the proposed merger to shareholders. The actual merger will not take place until the middle of the year and there is a slight chance of another party entering the frame. However, this is unlikely and it looks as though a new powerhouse has been created in the UK insurance market.
Very few stakeholders have welcomed the deal. The Stock Market has marked down the share prices. Staff who have already had to deal with recent mergers and acquisitions are punch drunk. Customers do not see the benefits to them of mega mergers. And brokers see this as a further contraction of the market – and fear the effects on them of a merger between two companies that already are having difficulties in providing a basic service to them.
We do, however, have a potential UK based global player who, at the moment, is immune from an overseas predator.
The key statements made to date are:
- CGNU will operate in the UK as Norwich Union. CU, GA and CGU will disappear.
- The merged company is intending to list on The Stock Exchange as a life company, as it sees a better rating for itself in this sector.
- It will focus in the UK on personal and small business commercial lines general insurance. It will exit areas where it cannot achieve market leadership or superior returns.
- 4000 jobs will go in the next 18 months in the UK, covering life and general.
The new company is set to dominate the industry, especially the provincial broking market. In the key markets of motor, household, property and liability, it has a 25% market share overall. In motor and household, it has some 27% of the market and in commercial lines some 20%. Its total UK premium income in 1999 was £5 billion, from which it made a profit including investment income of £307m.
Strategy in place
It is, by a long way, the largest supplier of personal lines business to the broker market and is the major commercial lines supplier, especially in the motor, property and small business sectors. It needs brokers' support as much as brokers need its support.
The strategy, however, suggests that it will not want to grow its UK general business. It wants to be seen by the stock market as a life insurer. So no ITT takeovers for CGNU. Future investment is likely to be in financial services or overseas markets where general insurance leadership has not yet been attained.
It will use its market dominance to increase rates and potentially reduce commissions. Market share is not crucial in the UK, profitability is.
It may exit medium to large commercial business. These sectors are not core to its strategy and exit may release capacity to grow personal and small business lines (The Competition Act permitting.) There seems little chance it will remain a player in the multinational or large corporate sector.
The danger of melt down
If it reduces exposure to larger risks, it will change the structure of the old CGU business significantly.
The need to meet the expense savings target is vital for the new executive. Service will suffer and brokers will feel the brunt of this as they have the customer interface. As CGU already has a real service delivery problem, there is a danger of melt down.
Goodwill of staff will be nearly impossible to maintain. The threat of job loss has been hanging over families for some two years like A Sword Of Damocles. Staff are not likely to have the spirit to go that extra mile.
The major impact on brokers could be the refocusing of commercial business to the smaller end of the market. There is already a limited market for larger commercial risks, and the loss of a major player such as CGNU will take out capacity. This may lead to a welcome hardening of rates but also a move to non-insurance alternatives.
Move to call centres
A focused CGNU would not need an extensive branch structure and the skill levels required would be different. A call centre approach would be most likely and underwriting skills would be statistically based rather than risk appreciation and relationship ones. A major local commercial player may be lost, and this could devastate local markets and accelerate the move in broker consolidation.
It is unlikely Club Elite will survive in the new company. Its champions have gone, and it has little relevance for both brokers and CGNU in the new order. A sign of its future will be if the proposed annual conference takes place in October this year. The new company will be NU dominated in the UK. The head office will be in Norwich and key directors announced to date are NU. It will trade as NU in the UK and the core strategy looks like a NU one. The merger was an important one for CGU to propel itself into the Euroleague. The deal was an excellent one for them, and giving up the CGU name in the UK was a small sacrifice to pay. Who would have thought 26 months ago, that two names such as CU and GA would totally disappear and be replaced by NU?
Little good news for brokers
With a NU led culture, we may expect to see more direct dealing of claims, lower commission, tighter credit control and potential reductions in agency numbers. Brokers will need to be careful that they do not give up too much of their major asset, the ownership of their customer.
So, overall there is little good news for brokers in the merger apart from the potential rate increases, which could feed through to more commission, unless this is cut in tandem. They face an extended period of poor service without reward, further changes in relationships, withdrawal and reissue of products and contraction of the market. They could see a major player exiting or slowly withdrawing from the middle/large commercial market. Industry skills will reduce again and it could be that local markets will disappear.
The move leaves RSA isolated, and the only one left for Allianz, AXA or Generali to take over if they want to be the largest UK player. Any bets that by next year another UK institution will disappear?