Anthony Hilton says 20 years after the first regulation of the City insurers are still undergoing massive change

Towards the end of 1985 a youthful and ambitious Michael Howard was beginning to pilot the Financial Services Bill through the House of Commons, paving the way for the establishment of the Securities and Investments Board and the first statutory regulation of the City.

Since then it has become clear that the great casualty of this period was the savings branch of the insurance industry.

In the 1980s it was a booming business. There were still some 300 separate insurance companies, most of which were making a comfortable living on the back of policies sold to assist with house purchase.

Costs were high but so was inflation, so returns appeared to be even higher and the papers were full of league tables showing which policies had delivered the best value over the preceding 20 years.

But regulation brought change to an industry unable to cope with it. First its routes to market were disrupted by polarisation, which created direct sales forces on the one hand and genuinely independent advisers on the other and succeeded basically only in making life impossible for both.

Then came a series of mis-selling hits culminating in the pensions debacle.

An insurance advertisement of the time said a drama was turned into a crisis by the failure of the industry to grasp early enough the scale of the problem and the reputational damage which would flow from it.

Then if there was still anyone out there who still had confidence in the industry one of the biggest names, Equitable, almost collapsed.

After this came the bear market, bringing doubts about the solvency of some of the biggest names. The regulator insisted that the accounting used by insurance companies should be changed in a way which demanded much more robust capital backing for long neglected nooks and crannies of the industry.

Though these problems have mainly focused on savings, their impact is spreading into general insurance too. The new awareness of the cost of capital and its scarcity, and the closer focus by analysts on the real drivers of growth mean that managements have been been made more aware of the costs of their strategies.

This year has seen a price war in term assurance and the signs and trends are similar in other personal lines, such as motor. There is a land grab going on out there as the distribution arrangements shift back from polarisation to depolarisation.

There is not enough room for them all - in fact as we shall see, there is not enough room for half of them. For many this is literally a fight for survival.

It has been a feature of the UK market for some years that the big players account for ever more of the market and collectively they are thought to account for somewhere between 50% and 60% of business done.

But this is an over simplification. As Bernstein analyst Bruno Paulson points out in a recent note, the top five insurers account for a much larger share in the eight major business streams where they probably account for 70% of what is sold in the UK.

This applies as much to general insurance products as to the mainstream savings policies. What Tesco, Sainsbury, Asda and Morrison have done in food is happening in insurance. The implications of this are quite obvious - or should be. The big players will sign up the choicest intermediaries, partly because they can afford to invest in systems which make the intermediaries' lives easier, and partly because intermediaries want to sell the products of companies they think are big enough to stick around.

Administration, compliance, accountability and regulation all favour the big rather than the small players be they companies or advisers. And once the big firms have tightened their grip on the market the squeeze will begin in earnest. IT

Anthony Hilton is a columnist with the London Evening Standard