Having spent last year getting its house in order, Norwich Union is ready to flex its muscles in the distribution landscape

In the insurer-buying-broker frenzy that has dominated recent headlines, the UK’s largest insurance company, Norwich Union (NU), has been strangely quiet. While some of its rivals have been swallowing up brokers and consolidation has ripped through the distribution market, the giant of the industry seems to have been sleeping.

But things have changed. While its competitors have been snatching distribution by buying brokers, NU has been quietly plotting its own line of attack – using its size to protect the independent broker and thus its own distribution channel. Whether its motives are entirely altruistic is open to question, but its efforts have been warmly received.

Perhaps NU had a quiet spell in the eyes of the outside world because it was busy getting its own house in order. Despite a lack of headlines, it has been a year of change for NU. The insurer has seen the appointment of new chief executive Igal Mayer who replaced Simon Machell, following an overhaul of the Aviva senior executive structure.

Shuffling the deck
Sweeping changes were made to NU’s operating structure and, since 2006, thousands of job cuts have been made including 30 director positions. The changes were implemented by parent Aviva to achieve its vision of ‘one Aviva, twice the value’. It focused heavily on growth and efficiency targets. The first phase of the programme alone set a goal of £200m in annualised savings by the end of 2008 and a target to see its expense ratio drop from 13.9% to 12.4%.

The changes were set in motion as NU was struggling through one of its worst performance years in recent history. Its 2007 results showed profits were down from £1.12bn in 2006 to £433m. The insurer lost more than £100m of business with its net written premium falling to £5.4bn from £5.6bn in 2006. It also reported an underwriting loss with its combined operating ratio rising to 106%.

Sales and marketing director John Kitson attributes the loss to weather-related catastrophes, declining rates, and problems with the insurer’s direct arm.

“Norwich Union Direct has been at the forefront of an unbelievably competitive personal lines direct market, because of the entrance and success of the aggregators,” he says.

But it hasn’t been all doom and gloom. Eight months after the insurer embarked on its transformational programme, Kitson, who now oversees the company’s entire distribution strategy, says he feels better about the company’s position than he ever has.

“We’re eight months in and we’ve got a lot of momentum,” he says. “We’re on it like a rash. All aspects of business are as good as they have been since I began working for the organisation.”

So with its top brass in place and changes bedded in, is it time for Norwich Union to change its distribution strategy? “We do not buy brokers. It will end in tears,” the affable Kitson says with a laugh. “Look at some of our competitors and the people they bought who seem to be leaving.”

It’s a strategy that has made NU popular with brokers trying to maintain independence, as well as with the major consolidators. Tim Johnson, chief executive of consolidator CCV – which earlier this month made its 30th acquisition, says NU’s decision not to compete in the consolidation market has allowed the two companies to enjoy a strong relationship without battling over the same targets.

“NU seems to be recognising at long last that the broker channel produces the best results

Grant Ellis, Broker Network

“From where I sit that’s helpful because it is quite deliberately leaving itself out of our space,” Johnson says. “I am less open with my information about acquisition targets to those that have their own consolidation strategy, for obvious reasons.”

Instead, NU has chosen to buy minority shares in a handful of brokers, saying they are good investment opportunities, while at the same time supporting those who wish to remain independent from the acquisitive insurers.

“We support the independent broker,” says Janice Deakin, NU’s corporate sales director, who was appointed alongside Kitson. “We want to be the broker’s friend.”

Befriending brokers
So far, the best of those friends, in the eyes of NU, is Jelf. In March, NU bought a 5% equity stake in the broker. Jelf, a consolidator itself, has a GWP of £242m. The group has also upped its margin more than 70% to 16.3% since it floated.

“We hold Jelf – [chairman] Chris Jelf and [chief executive] Alex Alway – as the shining example of the best equity stake we’ve ever taken,” says Kitson.

In February, NU sold its 7.5% equity stake in Jelf’s rival Giles Insurance to Charterhouse. The private equity house eventually acquired a 60% stake in the broker. NU’s stake initially cost £5.2m, but is believed to have been sold to Charterhouse for £13.9m.

The move raised questions in the market as to why NU would move to sell only five months after acquiring the stake, and what that meant about its distribution strategy. But according to Deakin, there was no choice. “We were a minority shareholder and the rest of the business had made the choice to sell, so we just went along with the rest of the business. We wouldn’t want to block what [chief executive] Chris Giles thought was best for the company,” she says.

The insurer will continue to buy stakes in brokers if requested and where it is a good strategic fit, she adds.

NU says the recent launch of its 110 Club will also give strength to those brokers looking to ward off the consolidators. Launched last November, the club is exclusive to brokers that place business with NU worth between £800,000 and £5m. Members benefit from access to a wide range of services and new schemes, an extranet offering marketing and HR, and compliance advice. They are also granted access to senior NU management and a suite of hospitality events.

But some in the industry have questioned whether these initiatives are really an altruistic move by NU to protect broker independence, or a way for the insurer to maintain control.

“Brokers want to grow their businesses and, to do that, they have to get their hands on funds,” says one senior market source. “There are finance providers that will lend money, but that comes at a cost. Insurers will provide funds at a lower cost, but brokers may feel pressure to place a percentage of their business with that company.

“The day we ask someone to come to NU because we are powerful and have an equity stake in that company is the day we have lost the plot

John Kitson, Norwich Union

“Whether an insurer takes a stake in a broker or lends it money, if the expectation is that the broker will place a higher percentage of its business with that insurer, it strains the independence of that broker.”

The question of independence
In a recent interview with Insurance Times, Groupama chief executive François-Xavier Boisseau, whose company has made several broker acquisitions including Carole Nash, Bollington and Lark, also questioned the motives of insurers buying stakes in brokers.

“What annoys me is the company that takes a minority stake to preserve an independent broker. What does it get from the counterparty in return?” he asked, in an apparent reference to NU.

But NU categorically denies that the move to buy stakes in brokers and launch the 110 Club is an attempt to gain control over brokers and influence where they place business.

Kitson says: “The day we ask someone to come to NU because we are powerful and have an equity stake in that company is the day we’ve lost the plot really. We’re not that crass. Our strategy is a show of support to the broker that wants to ward off other insurers.”

Lately that strategy has zeroed in on the small to medium-sized broking market. And, with half of NU’s £6bn premium income coming from brokers, it’s no wonder.

The company’s change in philosophy hasn’t gone unnoticed in the market. Grant Ellis, chief executive of the Broker Nertwork, says: “NU seems to be recognising at long last that the broker channel produces the best results.” Ellis says NU’s relationship with brokers has noticeably strengthened since Kitson was appointed sales and marketing director. “He is a great communicator,” says Ellis.

The vote of support would be welcomed by Kitson who says NU has spent a lot of its time over the past eight months talking to brokers, discovering what the insurer has done wrong and making a point of getting it right.

“I think it comes down to some of the senior changes over the past two years,” Kitson says. “Historically, there was a slight cloak of arrogance that we’re big, we’re Norwich Union and we know best, and you’ll do what we tell you to. Janice Deakin, Igal Mayer and I don’t do arrogance. We can’t stand it.”

If Kitson and Deakin have their way, the relationship between NU and brokers could look a lot different by this time next year. Change, it would seem, is inevitable. But like all change within the insurance industry, it will take time.

In the words of one broker chief: “Super tankers take a long time to turn.”