Soaraway Success

Despite the received wisdom that private motor insurance prices are falling, some motor insurers are doing very well indeed.

Geoff Riddell, chief executive of Zurich Financial Services' UK general insurance, accepts that overall the sector's prices are softening.

But Riddell pointed out an anomaly - and ladled praise on to a select bunch of insurers who apparently haven't noticed that they should be having a hard time.

Cox, Admiral and Direct Line were reporting "great results", Riddell told insurers at an investment conference hosted by Threadneedle Asset Management this month.

With a market average combined ratio at about 102% or 103%, "some people are making good money despite the market as a whole hardly breaking even".

What Riddell alluded to was that some insurers are posting combined ratios in the 80s.

Riddell also observed another anomaly: with claims inflation running at about 8%, the market overall was not showing the 4% to 5% price increases that might be expected in an attempt to keep up.

His insight was that some motor insurers were "competing very intelligently". Drily, he added a crucial qualifier: "But some are competing less intelligently."

This "less intelligent" competition probably explains the falling prices in much of the market in the face of rising claims inflation.

But Riddell hit on an important truth when he mentioned the more successful players.

Cox and Admiral are very different operations: Cox sells mainly through brokers and is based within the Lloyd's market. Admiral, like Direct Line, is a direct operation. But it left the Lloyd's fold for FSA-regulated status.

So how do these very different models achieve success?

Cox retail chief executive Neil Utley isn't unduly worried about a softening market.

He says: "We aren't pessimistic about a downturn because there's plenty of scope in it to make a profit.

"We are here for the brokers long term."

This is as is should be - brokers sell the largest slice of Cox's retail business, unlike its direct selling competitors.

Cox already insures one in four motorcycles on Britain's roads and Utley is circumspect when it comes to predicting how he will adjust the mix of business to manage a softening market. "One can't have a crystal ball on this stuff," he says.

"We are excited about prospects for special risks and fleet, but we are by no means not excited about private car."

It is this juggling of sub-sectors - each with its own mini-cycle - that Cox sees as the secret of its success.

Best return
By spreading its underwriting across different parts of the motor market it plans to keep its capital in areas giving the best returns.

And with capital and quota share to write up to £750m, there's plenty of capacity should Utley decide he needs it.

By contrast, Admiral is a totally different operation. As a direct insurer dealing entirely in the private car market, it can't reallocate capital between lines in the same way as Cox.

But with a market-leading combined ratio of 80%, it has clearly found another strategy for success.

Significantly smaller than most of its competitors - its total written premium of £333m is dwarfed by many - Admiral nevertheless runs an efficient ship without the economies of scale enjoyed by others. With an expense ratio of 15%, it leaves Cox standing at 26%.

Half its new business comes to Admiral from its website, helping to keep its costs low.

But underwriting director David Stevens believes that overall, it's the combination of a number of factors - good risk selection and claims management for example - that together keep the claims ratio and expense ratio down.

"It's partly about very efficient marketing and it's partly about being mean. We have a 39-hour week, which I don't think is typical of the insurance industry, and we're based in Cardiff which is a fairly low cost base."

It also escapes the burden of paying for a bloated corporate structure above it, unlike some of its larger composite competitors.

"Headquarters staff don't realise that they're a cost load and not a benefit," he says.

Admiral chief executive Henry Engelhardt attributes some of Admiral's success to better than expected bodily injury claims resulting in a claims ratio of 64.6%.

He adds: "We do believe there is no such thing as a bad risk.

"There's only a bad price. Getting the right price is what it's all about."