The 6,000 job losses in insurance announced since the start of the year can’t be blamed just on the credit crunch, says Lauren MacGillivray. Think instead of an industry struggling to understand its cost base and maintain its expense ratios.

Worried that your job is no longer safe? You’re not alone: fears of further blood-letting in the insurance world are lingering after AXA, Norwich Union and Zurich announced plans to slash their workforces.

As reported by Insurance Times earlier this month, 6,000 jobs in the industry have been axed so far this year. The latest major players to announce cuts, AXA and Marsh, have said they will cut 1,400 jobs between them. Their tallies follow Norwich Union’s announcement earlier this year that it would discharge 1,800 from its workforce by 2010, while Zurich has said it could scrap 900 jobs by the end of this year.

But while the credit crunch has taken much of the blame for the cull, Paul Delbridge, partner at Pricewaterhouse- Coopers, says the main cause is the lingering soft market – and depending on how quickly prices go up, job losses might be less extensive than feared.

“The rates have softened, particularly in the London market,” he says. “We’re seeing people having to shed headcount just to reduce their cost base, so it’s not actually even necessarily driven by the credit crunch. The cycle downturn is probably the bigger driving factor for the general insurance market.”

Much as a snake sheds its skin, the insurance market could be simply dealing with the downturn in a healthy and natural way – reducing costs by shedding employees in a way that preserves the meat of the company.

The worst might now be over. Despite fears that other major insurers would follow AXA, Norwich Union and Zurich, RSA and Allianz have both recently said that they have no plans for any major cuts.

Speaking earlier this month Allianz chief executive Andrew Torrance said: “What our competitors are doing doesn’t mean anything directly for Allianz. Our gross performance was strong relative to some of our competitors. That puts us in a potentially more favourable position.”

But he said that, like any business, the company was “always looking to get more expense-efficient. While I don’t anticipate any announcements about large-scale redundancies...we will continue to look to improve our expense efficiency”.

Meanwhile a spokesman for RSA said: “We have a continuous focus on increasing operational efficiency and reducing costs, but this is business as usual for us now. At our half-year results we confirmed that we had delivered our 2008 annualised savings target of £200m for the group.”

A recent report from Moody’s Investors Services says that the underlying performance of European insurers has remained relatively strong despite exposure to recent poor performance in capital markets. This, it said, is partly due to improved asset risk hedging.

But Dominic Simpson, a Moody’s senior credit officer and co-author of the report, cautions: “As major investors in global financial markets, Europe’s insurers are not immune to volatility or, of more concern, negative trends in these markets. Not all groups maintain the same levels of exposure to such events, but their H1 2008 results confirm that falls in the value of bonds and equities can significantly impact both earnings and capital.”

In the meantime, insurers would do best to concentrate on something they can have some control over. And what better to focus on than rates?

“While I do not anticipate any announcements about large-scale
redundancies . . . we will continue to look to improve our expense-efficiency.

Andrew Torrance, Allianz

Torrance agrees that market conditions are tough, but says that Allianz continues to take the right action on rates. At the half year, personal motor and home rates had increased by 5%, commercial motor by 8%, property 4% and liability 2%.

“We believe that our early action on rates means we’re very well placed when the market does harden and will ensure consistency of pricing through the cycle,” he says.

It’s not only the insurers that have suffered. A senior analyst, who does not want to be named, tells Insurance Times that all of the UK’s major brokers have struggled to understand their cost base.

“Because commission is typically charged as a percentage, premiums have shrunk with the market dip, which has put real pressure on the revenue line. People like Marsh have been cutting jobs to try and balance the books.”

He adds that insurers have also had a problem with their cost base.

“If you have a very large fixed cost base – a big infrastructure, branch network, field sales force – then premium volumes reduce, the average premium policy reduces because of pressure and the cycle downturn, and your expense ratio, which is expenses divided by premium, starts to creep up. So, companies find themselves having to slash jobs in order to maintain their expense ratio.”

Norwich Union’s phased transformation of its UK general insurance business has meant a cut in the number of its processing centres.

It says that this reduction is part of a plan to decrease its expense ratio to less than 11%. At the half year 2008, its expense ratio for the UK had improved to 12.8%; the target for the year is 12.4%.

Meanwhile, RSA has 9,000 staff in the UK at12 major centres, but has no dedicated operating centres. It has an expense ratio of 33.3% but this includes both operating expenses and commission.

The analyst says: “In the London market, classes of business are generally still profitable. You have to find niches but the expense ratio is now looking more important compared with the past. When the market was very hard two years ago, insurers were making significant profits, so the expense ratio wasn’t much of a consideration. But now the rates have dropped by 10% in some of the property catastrophe classes and we’re starting to see some real pressure on the expense base.”

Claims inflation has also added pressure, and the credit crunch has not helped as fraudulent claims have increased.

But experts agree that a spike in claims inflation could help force rates up, and higher rates mean safer jobs. So for the insurance industry at least there is a silver lining in the credit crunch after all.