Finding the right balance

The commercial lines market has been hit with the "double-whammy" of poor underwriting profits and rising claims costs for the past few years.

Both the commercial and personal sectors saw premiums fall after a raft of new entrants hit the market. Another problem was the October floods, which generated weather-related claims costs of £438m, compared with £240m in 1999, according to figures from the Association of British Insurers (ABI).

Business interruption claims were also high at £89m last year, compared with 1999 figures of £24m. In 1995, the figure was just £12m.

The Lloyd's Market too has suffered from considerable losses over the past few years. The market's global report said the 1998 account "was characterised by losses in virtually every sector" - major satellite losses, the Swissair tragedy, Hurricane Georges and the ailing motor market contributed to poor results. Underwriting losses for 1998 were £1.12bn, personal expenses £302m and releases from prior year reserves £390m.

What can be done?
Today, the market is slowly hardening, mostly because mergers and acquisitions have driven out some of the weaker players, but reinsurance costs are rising and are not being mirrored by rises in premiums. All this begs the question - what can be done in the commercial lines sector for insurers to see a return to profit?

Malcolm Tarling, spokesman for the ABI, says that insurers and brokers have not been paying enough attention to risk management in their commercial business.

"Risk prevention needs to be taken seriously," he says. "On the commercial side, there is a lot that policyholders can do, such as improving security and having contingency plans in place. Business interruption figures show that having such plans help to cut the cost of claims."

Paul Brearton, commercial director for Groupama Insurance, agrees with this and says that brokers have an important part to play.

"The only way for the insured to mitigate price increases is to use risk management," he says. "But the perception of brokers is that, when it comes to it, they want to keep insurers at arm's length so as not to cost the insured money."

He adds that brokers need to re-assess their view of risk management and see it as a worthwhile investment, rather than as a punitive measure.

But Brearton says that insurers also have a responsibility to ensure that their products are realistically priced, instead of reducing prices in areas that have not seen claims.

"Over the years, insurers have been guilty of reducing premiums in claims-free business, as they have all been competing for this trade," he states. "Then there are no funds to cover catastrophes, such as fire losses, storms and floods and the industry is weakened."

There is now a move towards higher pricing, with premiums being raised by about 15% but Brearton says an extra 10% is needed on top of this to see a return to profitability.

Partners, not rivals
While insurers may believe that brokers should be helping them to improve results, brokers too are becoming disgruntled.

Tim Ryan, commercial director of Ryan Insurance Services says that service standards have been falling in the insurance industry, due to mergers and acquisitions.

"The general insurance market has changed fundamentally over the past few years - insurers are now breaking long-term agreements with brokers in order to increase prices and profits," he says.

Ryan believes that the larger insurers could save a great deal of time and money if they could see brokers as partners instead of rivals. It is a common misconception that brokers add little value when it comes to risk management, he says, as his company offers the services as a matter of course.

Increasingly, insurance companies are looking at training their underwriters to improve results. Cornhill Insurance, for example, has recently launched its Underwriting Academy. The company, like others, has taken to excluding certain risks or raising the prices on them.

Chris Hanks, commercial underwriting and marketing executive, says: "Underwriters need to be able to look at the risk properly, to understand which ones they should be writing and at which rates.

"We put emphasis on the training of our underwriters, as they need to have discipline to stabilise the market."

A sensible solution
But Hanks admits that there are many outside forces that have affected the commercial market's poor performance in recent years, not least the raft of new no win, no fee legal companies.

"Inflation is 2% or 3%," he says. "But bodily injury awards have risen by 10% to 15% and this is having a dramatic effect on prices. There are more accident helplines and ambulance chasers than ever before."

He believes that insurers can come up with a sensible solution. While the insurance market is typically cyclical, Hanks thinks that it is possible to soften the peaks and troughs to encourage a more stable market. Naturally, a major consideration is keeping prices at a realistic level. This year, Cornhill has increased the prices for its commercial liability book by 15% to 18%, and by 5% to 6% for its commercial property arm.

"We are already starting to see an improvement in profits," says Hanks. "Last year the commercial motor arm was already back in profit and we would expect the rest of the commercial arm to come back this year or next."

Although insurers hope these price hikes will feed back into profits over the next couple of years, what remains to be seen is whether the increase in returns will be large enough to compensate for the massive losses of the past few years.

Commoditised packages for SMEs
Most large insurers are now offering commercial insurance packages for small and medium enterprises (SMEs).

These are becoming increasingly popular with insurers and brokers due to their ease of administration. Packaged policies are also good-value products for the customer, as they offer extra services that would not normally be bought - such as legal expenses and loss of profits.

AIG Europe has revently launched Financial Protector. The company's research shows there are 127,000 SMEs in the UK, each with a turnover between £1m and £75m. The new product is designed to fill a gap in the market, covering all exposures in one package. Management liability corporate manager Damian Coates points out that the product is particuarly relevant at the present time, as business owners face more intangible risks than ever - the maximum payout for unfair dismissal has recently increased from £12,500 to £51,700 and there has been a 100% increase in the number of directors dismissed over the past four years.

Broker Tim Ryan says: "These are ideal policies for SMEs, as small businesses often find they have trouble complying with bureaucratic regulation. With this package, they can ensure that they comply with EU regulations," says Ryan.

Chris Hanks says that the needs of SMEs are changing: "They are concerned with things such as cashflow and whether the council is going to pedestrianise the front of their premises," he says. "So it is up to us to try to find products that address these issues."

The products that are being designed are logical and simple, with questions being kept to a minimum. "For example, if you ask a hairdresser which postcode their business is in and how many washbasins they have, you have most of the information you need," Hanks says.

It is clear from this that the insurers will be increasingly concentrating on the SME market, as a way of moving away from expensive, bespoke and difficult to underwrite products.

Cutting costs by improving software
It has long been a complaint of brokers that there is inadequate software to enable them to communicate with insurers.

There is still a duplication of resources, as both insurers and brokers input data into their files, when insurers could be focusing on risk-taking.

"Why can't we authorise a sharing of information?" says broker Tim Ryan. "The problem is that the large insurers don't want to relinquish control and effectively do not want us in the chain at all."

However, insurers and software companies are beginning to address brokers' complaints, by coming up with a series of online communication and sales tools for commercial lines products.

One company that is dealing with the requirements of intermediaries and insurers is Redbox Systems, which recently launched Covermaker.net.

The system manages the communication of commercial insurance transactions between brokers and insurers.

Services offered via the website for insurers include quotation, authorisation and binding of risks online and details of policy wordings and terms.

On the broker side, there are facilities for renewals, changing policies and product templates. The application allows brokers to maintain control over their submissions until the risk is bound and with its full audit trail, brokers and underwriters can resolve queries swiftly.

In addition, it offers an individual messaging service that allows individual interaction.

Royal & Sunalliance (R&SA) has also recently launched Enterprise, a website to replace its commercial electronic data interchange. This allows brokers to communicate via the internet and purchase retail products online.

Simon Cooter, small business manager at R&SA, explains: "Enterprise is a very effective, truly customer-focused broker support system through which R&SA can guarantee high levels of service. We believe that the combination of service centre and internet development can provide brokers with flexibility, choice and excellent service levels, helping them to save both time and money."

Zurich operates a similar service, offering a commercial goods-carrying vehicle policy and commercial car insurance through its website.

The site was launched as a result of growing demand from brokers. Paul Hodgson, solutions assembly manager at Zurich, says: "This channel has lower costs than others, which should be reflected in cheaper premiums. It is also less time-consuming to obtain quotes and cover notes can be issued immediately."

Charles Whitfield, spokesman for brokers Layton Blackham, says that anything that can drive costs and duplication out of the system is a good thing.

But he adds that, unlike the personal lines sector, most commercial insurance products do not lend themselves to online selling.

He says: "The customer needs advice and someone to get in touch with if he buys the wrong thing. I have looked at a lot of sites but there are problems with reliability and understanding what you have bought."