2009 was a painful year, with recession, flattened rates and dwindling reserves causing a headache for the insurance sector. But the new year brings hope of a recovery, and so we asked members of our elite group of industry leaders, who make up the Insurance Times Power Network, to give their predictions for 2010
As a new decade dawns, the market seems to be looking to the future with a renewed yet cautious optimism. According to the results of Insurance Times’s first Power Network survey, key industry figures believe the sector has emerged from last year’s turbulent financial climate in surprisingly good shape. But the network warns that many challenges lie ahead before the insurance world can be given a clean bill of health.
The survey, inviting viewpoints from the exclusive group of industry leaders that make up the Power Network, reveals that two-thirds of respondents feel their business performed better than anticipated last year. Sixteen per cent say that performance fell in line with expectations.
There is good news for the economy too. The majority believe it is on the mend, with more than half stating they are reasonably optimistic about recovery in 2010. But the broad consensus is that this will be gradual, with the effects of the downturn, such as falling demand and business failures, continuing to impact on margins throughout the year.
More than half of respondents forecast little change in business volumes and profitability levels over the next 12 months. One in three holds a more optimistic view though, calculating a slight increase in both business volumes and profitability in 2010. Only 5% forecast a major increase in profitability over the next 12 months, however.
Furthermore, the majority of respondents believe that the lingering soft market is the main hurdle confronting the industry, with one in three naming the market cycle as the biggest challenge of 2009. Other respondents identify competition (26%) and rising claims costs (16%) as the number one challenge confronting their business.
As the general election looms, the prospect of political instability is also creating uncertainty. The Conservatives have pledged to dismantle the FSA if they win the election, leading many to question what lies in store for the industry when it comes to regulation.
There is a prevailing fear that any change in the status quo could see insurance continuing to be, as one member puts it, “lumped in together with the banks”.
Here, Insurance Times asks some Power Network members to reflect on the year gone by and their predictions for the 12 months ahead …
Andrew Torrance, chief executive, Allianz
I would say that 2009 turned out much as expected. We anticipated a big hit from lower investment income, and we have certainly seen that. But there has been less of an increase in costs due to fraudulent claims, as many feared.
My prediction for the economy is that we will recover. But it will be slow growth – I don’t think we will see unemployment start to come down significantly during 2010. In commercial lines, the shrinkage we saw in 2009 will stop.
I think profitability will improve on account of better rate strength coming through.
It is important not to forget that rates have gone up in 2009. They have gone up in commercial lines – not as much as I would have liked, but the commercial portfolio has gone up by about five percentage points. I think we will continue to see rates increase. By the end of 2010, rates should be moving up close to the 10% mark.
On the claims side, we have to deal with the MoJ reforms coming in, and I am hoping that Lord Justice Jackson will bring some radical proposals for reforming the compensation process. I envisage they will be wide-ranging and potentially more radical than the MoJ reforms.
The rate of corporation tax has not made the UK a competitive tax domicile for insurance capital. We have seen a number of companies taking action during 2009 by moving their capital offshore for more favourable tax jurisdictions. I think if nothing is done to reduce that corporation tax rate, we will see that trend continuing in 2010.
Francois-Xavier Boisseau, chief executive, Groupama
2009 was far worse than I expected. Two of the biggest challenges last year were rocketing inflation in motor claims and price comparison sites preventing rate increases materialising. I was expecting that 2009 would be the year that private car results would slightly improve – not spectacularly but slightly – but actually they have deteriorated further.
I think everybody has reached a limit in terms of the loss we are sitting on in motor. I think the next year is going to be as difficult as last year, but for different reasons.
I do expect 2010 to show a better picture in private car. But the big worry is what will happen in the commercial market, where rates have not moved at all, commissions are still high and investment income is going to be down further.
I think the results of commercial underwriting will deteriorate. So far, commercial has had the weight to absorb private car losses. But I think in 2010, commercial will not be there to absorb that loss. If the market doesn’t raise prices next
year, there will be serious problems. Overall, I don’t expect the market to grow and it will be even worse than in 2009.
The consolidator model has had a good time, but I think at the moment the consolidators are slightly under pressure. The only way they can move is through organic growth. They can’t increase commissions because they have reached that limit. Organic growth means getting new customers. But the problem is the recession is eating away at the SME market, with people going out of business or reducing their headcounts.
Kieran Rigby, chief executive, GAB Robins
The claims frequency in the general property market has been benign in 2009, with the exception of the weather events (flooding) towards the end of the year.
The financial climate has also affected us indirectly. If we are on panels with carriers and they are seeing a fall in GWP, then inevitably there will be some fall in claims. The significant change in frequency has caused issues in the past because our business model has a lot of fixed costs. But we have been investing in specialist lines and additional services, and that has given us a broader earning base, which did stand us in good stead last year.
The specialist lines, such as large losses, casualty, engineering, construction, investigations and the building services, are tremendously important to us. There is a real opportunity to get out and get business in those areas.
The continuing challenge for us is the head-to-head competition with substitute services, such as claims management.
In the pure adjusting sector, it has been a very intense period. There are a number of adjusting firms owned by private equity companies, as we were at one stage, and there is stress around the edges as some of the shareholders are not seeing the returns they may have expected. It will be interesting to see how that manifests itself on a competitive front. I think 2010 is going to be a mixed bag for many people.
Barry Smith, chief executive, Fortis
Last year, we saw a big squeeze on the industry. The first major challenge is that the profitability of many products has been eroded over the past 12 months, and more specifically in private car. There has been a tough time in the market. I think that has been due to external drivers, such as the reduction of customers’ disposable income.
In 2010, it will be a very difficult time for customers when it comes to affordability. Inevitably, the recession affects the customer and their needs and behaviours. It may mean that businesses are smaller and their insurance needs will require alignment. I believe that Fortis is in very good shape relative to the market. But in general, I see margins on many products still being very light. There is probably some evidence of rates hardening in fleet, but equally there is not a lot of rate change in other commercial line products.
When it comes to Solvency II and regulation, we will see much the same as we have in 2009. We have obviously all read the comments from the various parties about what they will or won’t do. But there is a reasonable possibility that there won’t be any significant change in 2010.
Finally, we are on a continual journey to help the customers see what good value they get from the insurance market, and there is a need to clearly differentiate the insurance sector from the banking sector.
Lord Hunt, chairman, Financial Services Division, Beachcroft
In 2009, it was unfortunate the insurance industry was tarnished with the reputation of the banks. My concern is that we are still awaiting a definition of principles-based regulation. We should have a series of principles that the entire industry adheres to, and get away from the preoccupation with form-filling and box-ticking.
In 2010, I would like to see the sector market its innovative products with greater force and clarity. After visiting the flooded areas in the north of England, I am concerned by the extent to which some people have not invested in insurance. We have to get the message across that they can sleep better at night if they invest in insurance.
There may well be a change of government next year, and we have to make sure the new one recognises the strength of the financial services industry. Without the expertise of the insurance sector, I strongly believe the recession would have been far worse.
I do think the government has to play its part in ensuring that we attract the best brains we have into insurance, and that we encourage people to develop their businesses here. The only way to promote free enterprise and a fair market is to invest in a low-taxation economy.
Eric Galbraith, chief executive, Biba
The biggest challenge of the past year was to get the market solution in place on conflict status and transparency. It was a culmination of years of discussion with the FSA and took a huge amount of work and cost to get that in place.
Secondly, the economic climate has had a huge impact, because the broking sector reflects what is happening to clients. Many have gone to the wall, have had reduced turnover, staff numbers and wages, and have looked at their overall insurance costs.
Looking ahead to 2010, I think brokers are going to have to continue in survival mode because the year is going to be continually challenging. I’m always optimistic, but recovery is not going to happen overnight and this situation is still very delicate.
Next year, we are going to see some changes to the aggregators, and hopefully they will adopt better practices, because currently many could be unfair and misleading.
One of the biggest issues for us in 2010 will be the potential change in government. If the Conservatives win, they have already stated their position with regards to the FSA and the Bank of England. It will be a major challenge to get our message to the government to ensure we won’t be shoehorned into an environment that is not appropriate to us, as has happened in the past.
Philippe Maso, chief executive, AXA
The biggest issues in 2009 were the economic downturn and the continued soft market in commercial lines. From the customer viewpoint, that might seem good for now, but the flipside is that if insurers do not get rewarded fairly, at some point it rebounds and there is a massive price correction – which is exactly what happened in 2002-03.
In personal lines, we have seen a turnaround in price, especially in private motor. But we still have the enormous problem of claims farming. This is a cancer in the industry that will hit customers, carriers, and eventually will hit brokers. It’s unsustainable, unjustified and bad. Very influential brokers are starting to really think about moving away from claims farming. We have left the GTA, we are negotiating our own terms, and the next step is to try to find a market solution that is more efficient, and to promote it.
MGAs are at the end of their life. Niche players will exist forever, but the very big MGAs are finding they have to reinvent themselves as something different, such as getting back to brokerage. The model has no future because the carriers are not accepting it anymore.
There will be a lot of change for consolidators in the market, and I think there’s a lot of sense in the idea that the national brokers may buy one or more of the consolidators. IT