The shape of things to come?

The panel

Francois-Xavier Boisseau - Managing director of Groupama Insurances, a medium-sized insurer with a turnover of £500m, specialising in personal lines, SME business and healthcare.

Dane Douetil - Deputy group chief executive of Brit Insurance Holdings, a FTSE 200 company, that wrote just over £1bn of business in 2003, of which about a third was in the UK SME market.

Marion Jewell - Director of Jewell Insurance, a broker specialising in insurance for women.

Bronek Masojada - Chief executive of Hiscox Group, an insurer writing £1bn of premium income, with a mix of niche retail and larger insurance and reinsurance business.

David Perry - Managing director of Folgate Warren Hill Risk Solutions, a specialist SME broker.

Chair: Michael Faulkner - Insurance Times

Michael Faulkner: How do you see the market at the moment?

David Perry: We are a little concerned that the stability of the market is starting to shake a little. There is evidence that in some areas, particularly the bottom end of the commercial market, competition is beginning to pick up pace. The other issue that is going to affect more people than is perhaps realised is regulation.

Francois-Xavier Boisseau: As far as we are concerned there are three points of interest.

The first one is that the dynamic in distribution is changing rapidly. There has always been movement in this area, but I think the pace of change over the last 18 months has really accelerated - and not just because of regulation.

The second aspect is the cost of regulation. This is probably understated.

And third, we are at a critical point in various underwriting cycles. These have become more and more aligned, and we are really at the moment of truth for the industry. We are seeing some stupidity in underwriting, but I wouldn't say it's a general movement at the moment, so it's going to be interesting to see if people can hold their nerve.

Marion Jewell: Our biggest competition is the direct market. Our biggest problem is persuading underwriters to look at the direct market rates and make some sort of compromise.

Dane Douetil: We believe there's no complacency allowed on rates. Claims inflation is still running higher than general inflation and we see no reason why rates should come down. We also believe there are still long-term reserving risks in the market, which shows that we still don't understand our true cost of sales from the past.

Bronek Masojada: In theory, better rating models should make people more disciplined, but we'll have to wait and see. In terms of liability, one of the biggest things is the US compensation culture coming to the UK.

MF: Francois, you said that underwriters need to hold their nerve. What's going to make them do that? Are there signs that the market is softening?

FXB: In some classes there is pressure on prices. I don't think people realise the cost of what they are selling. I'm not sure everybody really knows how to price liabilities properly. While prices are not decreasing on liabilities, the pace of increase is slowing down.

DP: Do you not think that, to some degree, this is because there's been an element of panic reserving as well? I know that many insurers have expressed concern about under-reserving as an issue. Has there been an overreaction?

DD: I think there's an under-reaction. The rating agencies are still saying that they think the industry is under-reserved by £30bn to £40bn on the casualty side alone. On top of that is the £100bn plus of reserving that's happened since September 11. The industry has systematically under-reserved for not just five or ten years, but maybe 20 or 30 years. That is going to have to be paid for.

MF: Do you think that with the current trends in liability rates, the industry won't be prepared for future losses?

FXB: I do. Claims inflation is bound to be double digit as consumers' attitudes change. The price increases that we have seen over the last two to three years were only to fill the gap of the past. I don't think there was anything to cover the ongoing administration.

As far as the other classes are concerned, we know that the market has been rather flat over the last 12 months. But injury claims are not static either, so pressure is going to come very quickly on the bottom line.

If you look at the property market, at least at the small and medium end, the pressure is intense, and we are starting to see some price decreases for good businesses. A lot of people are not covering inflation.

MF: Do you think that underwriters, despite what they say about maintaining underwriting profitability, are giving in and trying to maintain market share and that's why the rates are falling?

FXB: I think the analysts put a lot of pressure on the listed companies to maintain market share. I might be simplistic, but I have seen the cycle created by the financial analysts, who take a short-term view. But insurance is not a short-term business; we have to look five years ahead, whereas financial analysts look a quarter ahead.

MF: Will it ever be possible to break the insurance cycle?

BM: We look at the insurance industry as if we're the only industry that has a cycle, but other industries have cycles too. So I think we go over the top in the insurance industry about why we're a cyclical industry and whether we're going to iron it out to a nice straight line,

DD: I think we can flatten the cycle to a degree. If you look at our industry cycle, it is more volatile than other industries for two reasons.

One is because we're all estimating our cost of sales, and second we don't actually know the real cost of sales until some time in the future. If we can reserve better, we're more likely to get the pricing better the next year, which is likely to lead to less volatility. With new technology, good management and discipline we can reduce the volatility in our marketplace.

DP: Surely insurers have a bit of responsibility to drive a stable cycle and not engage in price-cutting.

We have spent the last 18 months to two years supporting the insurance industry and explaining to its clients why they have to fund huge increases.

A lot of us out there are a little bit nervous about a situation in which we see clients again and tell them that premiums are starting to go down.

DD: I think it's a dual responsibility.

Clients want stability, we want stability and brokers want stability - we all want the same thing. But people don't act as a marketplace, they act as individuals, and they're therefore going to always push for what's best for their own particular area. But we've all got to take our own responsibility and find our own way through.

MF: Let's move on to distribution channels. How much further do you think the direct model can go and what is the future of the high-street broker?

MJ: Well I'd like to think there is a future for the high-street broker, but I think the high-street broker has to change its attitude. It's not down to the broker to just sell the cheapest product. We could all go out and buy cheaper insurance, but it's the quality that you're buying.

If the high-street broker wants to survive, it's got to give something to the customer that the direct market can't. That, generally speaking, is personal service. What we'd like is to see is real support from the underwriters. If we want to survive we've got to do a better job.

MF: What sort of support would you like from the underwriters?

MJ: I'd like service, really good service. I don't want to have to wait for claims to be settled.

MF: How do you educate customers of the benefits of using a broker?

MJ: If you get a quote from Tesco's you won't know what your excess is, because they don't tell you. So we need to explain the product we're selling to the customer. The high-street broker has got a lot to learn.

He can't sit there and expect underwriters to do everything, but it would be nice to think that we could have a partnership and support each other.

High-street brokers have got to get away from putting their staff on commission.

That's a dreadful thing because staff don't care what they're selling. The management must make sure that the quality of business being provided to the underwriters is good.

FXB: In personal lines, I don't agree with those who think that the broker is dead, and that the only way is direct. I think the quality of the advice and the personal touch that an intermediary can give is there and will stay in niche and mass market areas. It's interesting to see that the direct market is plateauing, and maybe going slightly down. On commercial, it's totally different. There are opportunities and threats in terms of distribution.

A lot of people are speaking about direct, which for me means commoditisation - and that's the last thing I would like to see even for smaller risks, because on liabilities there is no such thing as a small risk, even if you're a one-man band.

MF: Do you think supermarkets and affinity groups will reach a plateau soon, or do you think they'll just keep growing?

FXB: The question is how far can you stretch your brand? What could stop their progression is if we do something about the industry's reputation. The only reason that Tesco is taking market share is because the public trusts it. It will plateau like any distribution - I don't know a distribution channel that has expanded forever - but how far it can go will depend on our capacity to change our reputation and our efficiency.

DD: There are four of five channels of distribution, which vary in prominence depending on the market cycle. For an insurer to focus on one is probably a mistake. We've committed to the broker market in the commercial side and we have no plans to be direct, but I am sure some of that business will go direct. We're not trying to be all things to all people, so we want a small number of agencies. Process efficiency is important. We have been able to invest a lot of money in trying to put our new system in place. We've got seven regional offices, and that will be it, and we should be able to service the entire UK through a very slick process.

MF: To what extent is SME business being commoditised?

DD: We are putting rating engines into certain areas - it's the only way you can effectively handle it. But an awful lot of business beyond that has to be looked at individually, particularly liability business.

We need to make certain that our underwriters are engaged in actually making a difference. Instead of having to look at everything, we should commoditise the areas that can be commoditised and then get the skill set that really matters looking at the more difficult risks.

MF: Is this opening the door for the direct market?

DP: That would be a big mistake. The thing you have to bear in mind about business people is that they take a huge amount of pride in the business. The care and attention given to a small firm is as important as it is to a very large firm. The small firms will want to be assured that all the risks that could destroy the business are covered.

DD: It is not efficient to employ an underwriter to underwrite a piece of business that pays £250. Insurance is not that complicated; we make it more complicated than we have to, but a lot of it can be looked at in a relatively straightforward way. Let's do that efficiently, knock out the processing costs and apply our intellectual capital to the bit that actually has to be understood.

MF: Are there too many insurers in the SME market?

FXB: Our definition of SME is very narrow - companies with ten, 15, 20 employees, sometimes 50. Others are not interested in our segment; they are targeting different trades and different sized companies. I think there is room.

MF: On that basis, is there enough business to go round?

DD: I think the question is whether there is too much capacity. In certain areas, such as UK professional indemnity insurance, there's a lot of capacity looking for business. In other areas, certainly employers' liability, it's probably at equilibrium at the moment.

I think brokers want more choice. They are getting very concerned that they are down to a small number of large players and that makes them very vulnerable.

DP: We've found that there are a number of large insurers who are now the SME experts. They've done a lot of work on segmentation and decided what the good ones are and they're going after them. This cherry-picking has left brokers with no markets for the more difficult cases. But there's over-capacity for what might be considered the target business.

BM: That's good, you're getting a more efficient, better-priced market, which is actually better for the customer in the long run, because then the good guys aren't subsidising the bad guys.

MF: Are insurers' service standards getting better?

MJ: Certain elements are getting better. But the big issue is the claims service; it's pretty bad at the moment.

FXB: The insurance industry has started to de-skill itself in some claims quarters. Not everybody is up to the standard necessary to deal with complex injury claims.

MJ: Not just complex, standard claims too.

FXB: Yes, even standard. I hope that the emphasis on the quality of the claims training is going to increase, because I don't think it has in the past. Generally speaking nobody can be proud of the industry's service standards. Having said that, there is no penalty for insurers' poor service. Brokers should be prepared to walk away if the insurer is not delivering - but they don't.

MJ: I did actually move quite a large account away from one insurer because of the claims problems. It was on a very basic technical point that I could not get a very inexperienced claims handler to understand. It upset my customer tremendously. So I moved the whole account.

DD: I come from a broking background and I certainly understand service.

I understand that making the broker look good in front of the client is absolutely critical. If we're going to say no to a risk, we should say so quickly and give coherent reasons why we don't want to do something.

But brokers have got to commit to service standards too. I'm very happy to get into service level agreements with brokers.

MF: When you've had those agreements in place, have they worked well and have the brokers been able to keep to their side of it?

DD: We haven't been doing it long, but we have them with a number of brokers and they're working very well for both sides.

DP: I'm actually going to surprise everybody here by saying that recently insurers have worked quite hard to try and improve relationships and improve service standards.

MJ: What I find quite amazing is that, as a broker, we have to know each of the contracts that we sell to our clients. But the person answering the phone at the insurance company doesn't understand their own products. They shouldn't be taking telephone enquiries if they don't know the answer to any question that's given to them on their own product. Bad service affects the reputation of the industry.

BM: I agree, but I think that the insurance industry does itself down in terms of its reputation. On the whole, insurers pay most claims rapidly and accurately, and there are undoubtedly some issues of incompetence but at least the general insurance industry is actually delivering on its promise to pay.

At least we don't have the systemic issues that the life assurance industry has.

But it almost seems to me it's easier to complain about general insurance, because on the whole it's not life-threatening. You don't hear that many people admitting that they had their life insurance or their pension with Equitable Life because it's too traumatic to talk about. The general insurance industry is better than it's given credit for.

MJ: But it's the image that we've got to get right.

MF: Should the industry be shouting about its successes more?

BM: If we have a service standard in which we promise to pay claims within, say, five days, then we can go out and tell this to the public. It's little things like this that matter.

DP: But on the other hand, the general perception out there is of getting insurance cheaply - it's discount, discount, discount.

DD: What gives me hope is that it is in our interests to understand and finalise a claim as quickly as possible. It is of no benefit to have it hanging around.