Big insurers are for the first time not looking over their shoulders to see the competition. . . it's out in front. Brian Hanney examines how they're going to catch up

Things are tough in the world of personal lines insurance and it looks as if they could get tougher still. Those fishing in this already competitive pool are having to face yet another wave of new entrants eager to reel in their share of customers wanting motor, home, health and a range of other insurance products.

Some years ago the direct writers decided they could make money by using television and press advertising to appeal direct to the public for their insurance business. A pioneer in this field was Direct Line, set up by the energetic Peter Wood.

As the new millennium dawned, it was the turn of the store retailers to try their hand, including such high street names as Boots, Marks and Spencer and Tesco.

Last year the "new kids on the block" included: esure, Peter Wood's latest incarnation backed by Halifax (or HBOS as it is now known); bluesure, which provides motor, home, travel and health insurance all in one package; and the giant Royal & SunAlliance's (R&SA) More Th>n, following the modern corporate trend for spelling with unusual symbols.

Individual risk
So, is there room for everyone in the new environment? For the new entrants, the answer will be to find suitable niches. Bluesure is currently selling eight products via the internet and call centre. Bluesure's Tony Martin believes the company can succeed with "a number of distinct selling points". By selling a combination of policies together - most people have at least motor, household and health - he says premiums can be pegged through the use of state-of-the-art IT systems and administrative savings, which are then passed on to the customer. It should produce savings of up to 50%.

He also reckons he has forced competitor Direct Line to cut its prices by 25%. "They're cutting out the middleman, but we're cutting out the admin. They're also spending £50m a year on advertising."

But direct selling is a less important part of the operation than the broker network. Bluesure aims to do around 75% of its business through brokers with the rest sold direct to promote brand awareness among customers. "We're asking more and more brokers to make it available," says Martin.

The company will also be announcing its first four broker deals at the end of this month.

The bluesure range can be extended to include covers such as personal accident and extended warranty.

"This way the customers pay for their own risk. If they haven't got subsidence, they don't pay for it," he says.

Another important development is the company's "risk data" investment, which can assess risk down to about eight to 15 houses in the case of household cover.

Bluesure made its appearance in August last year, claiming it would "revolutionise the way people insure themselves and their possessions". Its backers include GE Capital, a subsidiary of the giant US company General Electric. Its insurance business is underwritten at Lloyd's.

Esure was launched in July last year with the aim of focusing on good drivers.

At the time of the launch, chairman Peter Wood said: "Many drivers with exemplary insurance records have been paying too much for too long and subsidising less careful drivers."

The company believes its telephone operation can offer careful drivers - who constitute 65% to 70% of the market - savings of up to 30%.

Future plans
The company has now started to offer a home contents policy. Motor insurance will be offered on the internet within the next month. Other general insurance products are also planned.

According to esure's Laura O'Connell: "It'll be multi-channel. The internet side will grow exponentially, though the majority still prefer the phone." The company is also looking at the possibility of exploiting interactive television.

She says products like esure's do not at present put pressure on the large composites to cut prices.

R&SA spent £20m marketing its More Th>n product with messages proclaiming Where's Lucky? It was designed to look like an appeal for a lost dog, but in reality it directed potential customers to its website.

Unlike Prudential's Egg and Abbey National's Cahoot, it is not a standalone product. The company promotes it as "More Th>n from Royal & SunAlliance" to stress that it is backed by a long-established insurer with billions of pounds of assets and not a fly-by-night newcomer.

It has put £20m into developing its

e-commerce technology and is looking to attract 400,000 new customers a year, as well as appealing to its existing two million customers.

Good news?
The question is though, can these new companies and products be good news at a time when the market is looking forward to hardening rates?

Many of the larger companies aren't too concerned about these new start-ups, but Philip Nunn, head of e-trading at Norwich Union (NU), accepts that the market has gone through "a period of trial".

Nunn says the online sellers will have "varying degrees of success", though he points out that Screentrade, which brought out a purely online brand found it difficult to do and it had to close the operation.

Nunn says: "But, for the generation that has grown up with new technology, the chances of survival are better."

NU is, naturally enough, relaxed about the challenges. The company has done a lot of work on its motor account to provide a single pricing platform.

"But, whether it's direct or through a broker the core product is identical. I don't think just because another entrant comes along it will necessarily put pressure on prices. However, more entrants may make companies more price conscious," says Nunn

NU describes itself as a fully integrated multi-distribution insurance company, which means it is happy to service the high street or the corporate sector. It has no plans to launch an operation like More Th>n.

"We already play in each channel. There's an online option for customers," says Nunn. The company also has strategic alliances with others as well as its own ways to reach customers.

Allianz Cornhill says it expects the personal lines market in 2002 to be "challenging and dynamic".

Personal lines marketing manager Suzanne Chesterton says: "The market will be characterised by continuing rate pressure from the direct writers, low interest rates, escalating reinsurance costs and increasing claims inflation."

She says there will be "a steady stream of new entrants persistently challenging the traditional routes to market".

Rate pressure
However, Cornhill has no plans to allow rates to soften in the face of new entrants. Instead it will focus on broker distribution.

Chesterton says: "Our strategy will be to strengthen and deepen our relationships with brokers and to use brand strength to build loyalty with customers.

"We expect to strengthen our household rating to take account of rising reinsurance costs and to apply increases across the motor business commensurate with spiralling claims inflation on personal injury."

David Hiddleston, group business development director at Churchill, a subsidiary of Winterthur, which is in turn owned by Credit Suisse, says his company is not "frightened by any challenges".

Churchill recently decided to link up with Prudential to sell motor and household policies to the Pru's four million medium and long-term UK savings customers.

Hiddleston says: "The market is reducing still. Many in the industry are more worried about their jobs than rates. But we'd like to see prices go up."

But as esure's O'Connell says, the new entrants aren't hurting anyone at the moment because they're small. "But in a few years' time all that will change."n

In November, Prudential and Winterthur, owner of Churchill, announced they were to form a long-term alliance to offer general insurance products in the UK.

The move was a propitious one for Churchill. Last year it lost its arrangement to handle 135,000 motor policies on behalf of Halifax to the newcomer esure.

Many in the industry believe the deal is a fightback against the new entrants, although the companies concerned do not quite see it that way.

Under the agreement, Prudential agreed to transfer all its UK personal lines business to Winterthur and Churchill. The companies will be able to renew these policies and sell motor and household cover to Prudential's four million medium and long-term savings customers for 15 years.

The transaction is expected to generate £810m for the Pru through a combination of upfront and future payments and the release of capital from the general insurance business.

For Winterthur/Churchill, the addition of Prudential's general insurance business gives the companies a top five position in the UK, with gross premium income of £1.9bn.

According to Prudential, the deal is simply to do with "a strategic alignment of the business". A spokeswoman said it gives the company the opportunity to focus on its life and pensions business. The products will be Prudential branded.

Churchill also denies the move is designed to hit back at the newcomers. "It's part of our strategy. We have a whole raft of alliances," says director David Hiddleston.

He believes it will not herald a major change in the way motor and household policies are sold.