Chris Hanks warns of high broker network costs and pressure to reach underwriting targets, but he tells Elliot Lane that Allianz Cornhill is ahead of the game in SME business
Chris Hanks' love of brokers, he admits, is quite mercenary. "They pay my wages," says Allianz Cornhill's general manager. But the proliferation of broker networks, with one a week appearing on the horizon, does worry him.
"To be honest, broker networks could end up costing insurers as much as regulation. Particularly if the technology is not there. If regulation costs us 2% and then add another 1.5% for networks, that's 3.5% we can't afford. We have to make sure there are no duplications."
"There will not be 500 networks in two or three years' time, there will be winners and losers. And I don't think anyone knows which model is right. Folgate's model is viable and we are on its preferred panel. And TBS can work."
Hanks does not think the middle market of brokers will vanish. Some will diminish in numbers and others will still survive against the odds. But they may be not independent.
Hanks says: "Allianz Cornhill is remote from its customer as 80% of its business is traded through the intermediary market. Over the past decade I think the client has been offered, and received, a good service from the broker but insurers have offered in return a crap service to the broker, because of the amount of mergers that have taken place. Our service has been good because we didn't have to contend with mergers or integration issues."
Insurers will have to adapt too. To appease the ratings agencies, and keep the ratings high, it is prudent to move from the risky equity market and swap to bonds, he says.
"Bonds are less volatile but you don't get the returns. So I think the best insurance companies will spend time making a technical profit, and investment income will play a very minor part in running the business.
"Also the trend of running insurance companies at combined ratios of 101% to 102% is gone. You must run at no more than 95%. There is also a school of thought that you must run in the 80s. Because if you run at 85% and every three to four years you get floods, then that is just part of the peaks and troughs. If you run at 95% continually you haven't the buffer."
He cites Cox as a good example, which in its results two weeks ago, reported a combined ratio of 86%. "Cox is a well-run business, it has shed itself of its problems and is ring-fenced, and it is predominantly motor. It is a good time for motor."
Allianz Cornhill's own motor book has performed well, says Hanks. "I won't tell you the exact figure because I don't want our competitors to know, but it is around the 84%-87% mark."
No major fires or environmental disasters has allowed the property book to "outperform" the market, he adds.
Specialist actuary EMB is working exclusively with Allianz Cornhill to build a component pricing model for the SME market. A highly-segmented and sophisticated rating model which is very similar to those used in personal lines, but geared for commercial business.
"Segmented systems is where all the major players will eventually end up. We are ahead of the game at the moment," says Hanks.
Accessing "good, clean data" is relatively easy for motor business, but Hanks admits the challenge is finding the similar quality in SME business.
"There are only so many cars, so many ages of people and convictions. You can get statistically valid data for motor. In the SME, it's not so easy. A fishmonger's shop is very different from an ironmonger's shop. And a shop is very different from a small timber yard, or a marine engineer's workshop.
"We are building a commercial lines data system with some of the elements you would see in a personal lines model. It looks as much about the individual as it does about the risk itself."
As more insurers shift the focus to the SME market, Hanks expresses surprise that Royal Bank of Scotland (RBS) is planning to offer NIG 'warm leads' from its customer base.
"Why would you risk giving out key customer data to NIG when this information could find its way into the broker market? Why give the likes of Layton Blackham or Marsh that intellectual property?
"The bancassurer as a model has not really worked in this country. RBS would be loathe to give out great swathes of its customers."
He also questions why RBS would want to get involved in the "cyclical nature" of the commercial lines market on its balance sheet.
"In the same vein, why wouldn't Allianz Cornhill want small loans business on our books. Because we are not bankers."
Peaks and troughs are part of an insurer's business, which Allianz Cornhill is equipped to handle, says Hanks. "Ourselves, AXA, NU, R&SA have far greater data pools than RBS."