BDML dominates the affinity market, and to keep it that way chairman Sandy Dunn is heading into cyberspace. Elliot Lane reports.

Accolades seem to follow BDML Connect, "much to its surprise", says the self-deprecating Scot, Sandy Dunn. The 'insurer behind the brand' - its common nom de plume in the industry - took the top spot in the 2005 Sunday Times Profit Track 100 and has been named twice in the newspaper's Fast Track list.

In this year's Top 50 Broker rundown, the company has stepped up the ranks again, gaining ground off the back of its new parent, Capita Commercial Services, which acquired it last September for £26m.

Achieving a 23.3% rise in one year has pushed its GWP figure to £19.9m in the 2006 league table, against a fiercely competitive affinity market.

"We have led the way in this market since our inception eight years ago.

But the likes of Equity and Budget have moved further into this market and are now our largest competitors.

"Where we differ is we make sure there is no conflict of interest with our key partners on brand and capability. Our competitors might have a problem," says Dunn.

His major frustration is the softening motor market and the uncertainty in the rating strategy across the board.

The recent EMB motor report (Insurance Times, 22 June) showed that rates must harden and that the big release in back year reserves among the major motor insurers, due to over-estimated provisions for bodily injury claims, has skewed the figures towards 'phantom profits'.

"I'm appalled by the rating decisions being made by the larger motor insurers. If you look at the past few years, and the recent EMB report endorses this view, operating ratios and margins are just too low in many cases.

"They must wake up. The rating climate is testing the strength of this market and inevitably years of flux in pricing is bad for customers," says an impassioned Dunn.

Overall, the motor market has succumbed to the "poor assessment of risk", leading to over-reserving and inevitably inadequate pricing levels, adds Dunn.

"Against what many of the insurers have been preaching over the past two years, volume is definitely winning over profit," he says.

To retain its dominance, BDML has decided to focus its efforts on its affinity partnerships with "digital" retailers such as PC World and internet providers.

"I see the growth market as internet and the retailers with advanced digital and electronic capability.

"Areas such as PDAs, Sat/Nav, MP4 technology and HD-TV developments are where retailers see growth potential and we need to design products for this customer. It will enhance the brands, at marginal cost to enhance revenues," says Dunn (see box).

Earlier this year, Dunn said exploiting Capita's strong relationships with housing associations and local authorities to sell insurance products directly on the back of council tax bills and other amenities would be a growth market.

This year alone Capita has won a 10-year £12.6m contract with Rossendale Borough Council; a seven year contract worth £50m with Westminster City Council; plus a 10-year contract with Birmingham City Council worth £475m.

However Dunn has taken a U-turn on this strategy.

"Housing associations are not high on my agenda now, technology is the way forward," he says.

The plan this year is to push its SME initiative. Ex-Oval head of commercial lines Peter Brown joined BDML Connect in spring and has built a team to sell its core portfolio to the SME sector.

Dunn says: "It has taken a while longer to get the supplier and distribution channels right but things are moving towards a positive.

"Peter's team are working on this deal by deal. They are knocking on enough doors so I expect to see results in 2006/2007."

Taking insurance into the matrix

Brokers heading into cyberspace is a difficult transition but many are beginning to understand the realties. Mid-sized UK brokers are already starting to realise that knowing the customer and the community he/she relates to and trusts is the only true way to gain an advantage over the internet providers.

In fact it's about thinking how the matrix works and then playing it at its own game.

"The way in which search engines like ebay and Google have used data and Interacted with the community makes them the most likely Intermediaries of the future.

"Brokers must start to think In the same way," says Dermot Joyce, executive director, Capita Insurance Services.

In March this year, Capita published the results of extensive research into the insurance industry's greatest competitive fears. The conclusion was the entry into the market of internet suppliers such as Amazon and Yahoo.

According to a study undertaken by the Economist Intelligence Unit, in conjunction with Capita Insurance Services, 55% of those questioned said online brands posed the biggest competitive threat, followed closely by utility companies such as BT and Centrica (42%).

This rising threat, born from major changes seen by the industry in recent years, is led by the increased prominence of 'affinity' brands - retailers and high street banks - leveraging their distribution power and brand recognition.

Joyce says: "The Internet has proved itself to be the channel of choice for price conscious consumers across the globe. It is therefore, hardly surprising that a price sensitive market like insurance is worried about the threat from dominant brands in the sector.

"The leverage of recognised brands, through affinities, and unrivalled customer service will be the key differentiators of the future.

"The largest internet companies are not just transactional brands but virtual communities. Amazon and Google did not acquire millions of customers through traditional marketing but through a combination of viral marketing and word of mouth around a useful core service.

"Today they are sitting on a massive distribution platform, with a relatively loyal customer base, and an enormous amount of consumer data and wondering what else they can do."