The short-term fallout from the Independent collapse has been highly visible, with insurers working around the clock to pick off the surplus business in the market. Amanda Swinburn investigates the long-term ramifications.

The collapse of Independent on June 12 has caused turmoil in the insurance industry. Brokers are cancelling their summer holidays in droves and working around the clock to replace business and answer calls from concerned customers.

According to last year's Independent report and accounts, commercial insurance made up £578m of its £830m gross premium income, the bulk of which was property or liability.

Insurers have been straining to pick off the surplus business in the market and, indeed, most of the major insurers have gained significant increases in their commericial books.

But what remains to be seen is how Independent's demise will affect the market in the long-term.

While the general consensus in the industry is that premium rates on the commercial side are bound to rise, a few insurers are taking on "rollover" blocks of Independent's business without pushing up premiums.

However, Gary Carroll of Midland Risk Management says most brokers have had to replace former Independent business at much higher rates. He says: "There was always pressure for rates to increase and, now that we have £1bn of rates in the market, insurers have found they can push for much higher prices."

Much of Independent's commercial lines business was in selling packaged policies to small to medium enterprises (SMEs), an area which Carroll believes is very attractive to the rest of the market as it involves low costs.

He claims one problem which has arisen is that insurers think they can charge any price for the business. "Brokers have had to do a fair amount of arm wrestling to ensure insurers are not exploiting their customers," he says.

But St Paul's general manager of sales, marketing and distribution, David Bevan, says the price rises were inevitable.

St Paul has so far picked up "several million" pounds worth of Independent's business and is pricing each policy individually. Bevan says St Paul's is aiming to be selective when choosing what business to take on. "We would not want to continue cover at the rates Independent has been charging," he says. "Its prices were 30% or more below what we now feel is the right level. The fact is the business needs re-pricing and re-underwriting."

He adds that former Independent customers are happy to pay a higher price in return for security and says while some insurers are keeping commercial rates low at present, the situation is not sustainable.

This view is echoed by Mark Bishop, spokesman for Allianz Cornhill, who believes premium levels at the end of 2001 will be significantly higher than at the start of the year. "We have picked up a large amount of Independent's business, but have done so on our own terms," he says.

Substantial rate increase
Royal & Sunalliance (R&SA) has taken a different route, by agreeing with insurance brokers Aon, Marsh and liquidators Pricewaterhousecoopers to provide continuation of insurance for Independent customers, under existing premiums and conditions. This was initially agreed for a 30-day period, which has since been extended to run until the time the policy is due to be renewed.

"We were concerned that, as customers have repaid their premium from now until the policy is due to be renewed, increasing prices on top of that would be a double-whammy," says spokesman Mike Wallwork.

However, he adds that when the time comes for renewal, rates will increase substantially. R&SA's analysis of the market has shown that, while Independent's personal lines business was similarly priced to the rest of the market, the commercial side was grossly underpriced.

In one case, R&SA underwriters checked a policy which had been charged by Independent at £300,000. They found the correct premium should have been closer to £2m.

"This is an extreme case," says Wallwork. "But, in most cases, we have found Independent's commercial policies to be 25% to 50% underpriced."

R&SA now predicts that it will write £100m of Independent's former business, £60m of which will come from commercial lines.

Axa has also been quick to pounce on Independent's SME business and announced last week that it was to take over the insurer's site for small commercial risks,, for an undisclosed sum. The site offers cover for hotels, shops and small manufacturing companies.

The 17-strong team responsible for the site's development will be kept on.

Axa's programme director of strategic programmes, Claire Duggan, says the move will help the company to stay on track in terms of its e-commerce strategy.

The site focuses on small premium commercial risks up to about £5,000 and enables brokers to receive confirmation of cover and policy documents back over the net, although they will still have access to an underwriter.

Upward rate pressure
Rating agency Standard & Poor's recently confirmed that Independent's policyholders have been scrambling to get cover from other insurers, leading to an upward rate pressure. But, it added, ratings are likely to stay the same.

There is a stable outlook for the market, which has been attributed to rate improvements, consolidation, more selective underwriting and reduction in capacity, despite a continual fall in investment returns.

But the more stable market is likely to be of little consolation to the Independent commercial customers who are facing unpaid claims, double payment of premiums and the added cost of price hikes, or to the brokers whose businesses are under threat.

Who should be held accountable?
In the wake of Independent's collapse, a key concern has been what will happen to the corporate customers who still have claims outstanding.

While the Policyholders Protection Board (PPB) will pay out for private customers and employers' liability, companies are being left to make their own arrangements and there has been much debate about who should be held accountable for what could amount to crippling costs for some firms.

Gary Carroll of Midland Risk Management says the reaction from the insurance industry has been disappointing.

"The Association of British Insurers (ABI) and major insurers have been keen to take on Independent's business, but have made no attempt to look after commercial clients who have claims in the system," he says.

However, St Paul's David Bevan maintains it is the role of the government, brokers and ratings agencies to take responsibility: "It would be unfair if we had to pick up the tab for underpricing."

More than 2,000 of Independent's creditors have recently announced plans to raise about £1m in a bid to take group action against the companies involved in the insurer's collapse.

The creditors of Independent Insurance Group will target Independent's auditors KPMG and government bodies such as the Department of Trade and Industry (DTI) and the Financial Services Authority (FSA) will also come under fire.

The investigation is to be separate from that currently being conducted by the Serious Fraud Office.

Managing director of Argyll Insurance Brokers Kevin Young, who is chairing the group says he has heard from brokers of at least five companies in perilous financial positions.

The collapse of Independent has called into question the concept of self-regulation in the insurance industry, and it is likely that there could be calls for more stringent governmental regulation of the market in the future.