Will rates finally turn this year? Will the FSA become your worst nightmare? Will the mergers market be struck dead? Michael Faulkner gazes into the future – and consults four industry heavyweights – to look for answers

Mergers and acquisitions

Consolidation in the broker market will slow markedly from the frenetic pace of 2007 and the first quarter of 2008. Instead, most major consolidators will focus on integrating their business and organic growth.

Activity will not grind to a halt, however: the money is there for sensible mergers and acquisitions at sensible prices, with some good-quality targets and scope for some fire-sale bargains as the recession bites.

For insurers, too, there will be opportunities. As more financial institutions prune their balance sheets, many non-core assets could be put up for sale, including insurance businesses. This is already happening at Royal Bank of Scotland; a small part of HSBC’s underwriting division, HSBC Insurance (UK), is also on the market. The limiting factor will be the availability of funding.

Meanwhile, Bermudian insurers remain interested in the Lloyd’s market and will be eyeing potential targets as a way to diversify. Some consolidation among the Lloyd’s insurers cannot be ruled out either.


This could be the year in which the market turns. Insurers, battered by investment losses caused by the financial crisis and catastrophe claims, will want to increase rates to boost the profitability of their underwriting.

Rates in some lines (such as catastrophe-exposed business) have already started to harden. Property catastrophe rates rose 8% on average in the 1 January reinsurance renewal season, while casualty reinsurance rates were up 5%, according to Guy Carpenter, a risk and reinsurance specialist. This will add to the upward pressure on primary rates.

Financial performance

Insurers’ results for the 2008 financial year, due to be published in the first quarter of this year, are likely to be pretty poor. Soft market conditions will have eroded underwriting performance, while the financial crisis will have hammered investment portfolios.

Performance this year is likely to be similar, if not worse, as it takes time for rating decisions to filter through to the bottom line. The industry’s performance last year will be the catalyst for serious rating action this year. The situation is not expected to improve until 2010 at the earliest.

The downturn will also dent demand for insurance products and will have a significant impact on claims costs, while the number of fraudulent claims is likely to increase.

This year will also be tough for brokers, as clients examine their insurance budgets – or go bust. The timing of the hard market will be crucial in limiting the impact of falling demand on revenues.

There will always be exceptions and the strongest companies will stand out more.


Brokers will begin grappling with the new guidance on commission disclosure, which should be finalised in the first quarter of this year. The FSA will also be keeping a close eye on how the industry is coping with the Treating Customers Fairly initiative.

On a broader level, the authority will have to adapt to cope with the financial crisis. Lord Turner, the regulator’s chairman, has already indicated a tougher regime is needed. It will be looking more closely at higher-risk businesses, such as major wholesale firms and financial institutions.

This will be a key year in the development of Solvency II, as efforts are made to settle the squabbles in Brussels that could derail the European directive on insurers’ capital adequacy.


  • John Kitson: rates will dominate

Rates will continue to dominate the industry news pages and the first quarter will show a continued upward movement.

Some UK aggregators will struggle with continued advertising spend and decide to merge or call it a day.

Claims farming will become a massive focus for insurers – with customers benefiting in the long run from better service and better prices.

Consolidation will flat-line, with smaller brokers continuing to show great resilience.

The recession will focus everyone on the importance of the right insurance cover and focus providers even more on the costs of distribution and on organic growth.

At Norwich Union we will successfully complete one of the largest financial services rebrands and change our name to Aviva.

I will still receive harsh e-mails and letters on commission and rating strategy, but will remain resolute while drinking Lucozade or smoothies and an extra four bananas to keep my stress levels down.

Finally, the new-format Insurance Times will be loved by all – the old size is so 2008.

John Kitson is sales and marketing director at Norwich Union

  • Stuart Reid: a tough year

As nearly all but the most optimistic of commentators predict, it’s going to be a tough year.

For me, the real key to success will be how much the larger insurers are prepared to sacrifice top line (gross written premium) for bottom line (profit). This will be the pressure valve that the inevitable rating increases rely on.

Merger and acquisition activity will be slow, despite the loud announcements from some that their wallets are bulging. Prices will be significantly down on 2007 and early last year. There still will be consolidation and start-ups; these economic circumstances lend themselves well to start-ups led by people who are brave and not afraid of hard work.

Although the FSA has agreed to an industry-led solution on commission disclosure, I expect closer and more detailed scrutiny of our industry this year. The FSA has faced inevitable criticism on the banking crisis and will be working hard to ensure nothing similar happens in any other areas of their responsibility.

Finally, we will hear a lot more from people at the top of their businesses as they either defend difficult decisions or sing about wonderful wins.

I did say it would be a tough year ...

Stuart Reid is chief executive of Bluefin (formerly Venture Preference)

  • Ian Clark: a mixed bag

History shows that recessions preceded by financial stress usually have the greatest impact on the time it takes for gross domestic product growth to recover. In addition, the cost of credit has risen considerably in the past year and its availability has plummeted while interest rates continue to fall.

However, in a market where both business and consumer confidence is falling, the share price of insurance brokers and the Lloyd’s listed stocks have significantly outperformed the stock market.

So is it all bad news?

Well, for brokers the prices paid on acquisitions fell last year as a result of a lack of funding available to potential buyers. This is likely to restrict the ability of many brokers to grow in the medium term.

Those with a high proportion of business in sectors under strain – for example, motor trade, housing, construction and retail – will be under particular pressure. For those in the small and medium-sized enterprise market, the share of direct providers is likely to increase, at least for micro-products. All this is set against a background where customers are more likely to shop around and less likely to buy extra products and services.

For insurers, the number of claims is likely to go up as unemployment rises – and crime, fraud and vandalism increase. But it is not all bad news. New vehicle sales may dip, but annual mileage per vehicle should fall and more people are likely turn to smaller vehicles. As a result, loss frequency and severity is likely to decrease as premiums harden. Buyers are also likely to take higher voluntary excesses and to seek less broad coverage.

All in all, 2009 is likely to be a mixed bag for the insurance industry. But businesses will still prosper if they understand their clients and the pressures they face.

Ian Clark is a partner in the corporate finance insurance practice at Deloitte

  • Steve White: more co-operation

Regulators by their nature tend to be reactive, so the global credit crisis will have an effect on them for some time.

First, the focus of supervisors will undoubtedly switch away from “less critical” areas to more prudential matters such as capital adequacy and liquidity.

Second, with many large financial institutions trading globally, there will be much greater and visible co-operation between regulators.

Third, moves to regulate the credit ratings agencies will gather pace as the lessons learnt in the run-up to the current crisis are converted into actions.

Last, the whole debate about compensation arrangements and how these are funded will resurface as the financial markets begin to stabilise.

Steve White is head of compliance and training at Biba