Allianz sends shockwaves through UK insurance market


In a single day last month, German insurer Allianz struck two deals that catapulted it into the ranks of the biggest UK providers of car, home and business cover.

Its move to muscle in on an already competitive market presents a fresh challenge for UK insurers, which are already battling weak premiums and rising claims.

Aviva, Direct Line and Admiral will now have to deal with another problem — the arrival on their turf of one of the world’s biggest, best-funded competitors.

Allianz paid £242m for Legal & General’s general insurance business and £578m for the 51 per cent of LV’s general insurance operation it did not already own.

The deals make it the second biggest player in the UK general insurance market in terms of share of premiums.

The entry of such a powerful rival suggests tougher times ahead for UK providers. Allianz has a €900bn balance sheet and has invested heavily in the sort of technology that might give it an advantage in key areas such as underwriting and customer service.

“This is not a great deal for other companies in the market,” said Kamran Hossain, an analyst at RBC Capital Markets. “Allianz is not renowned for being aggressive on market share, but over the long term they could have a cost advantage over other companies.”

As well as the dominant operators, the UK market consists of a large number of small and midsized companies jostling to win market share by offering heavy discounts for new customers on price-comparison sites. That increases the pressure on other providers to follow suit or risk missing out on new business. 

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The result is that underwriting profits in the industry are always either low or non-existent. According to consultancy EY, the UK motor insurance industry has only made an underwriting profit in five of the past 33 years.

Insurance company profits tend to come from added extras such as the fees providers charge to pay in instalments or cancel policies, rather than from traditional underwriting. 

However Allianz was undeterred. “The UK market is one of the largest in the world,” said Niran Peiris, a member of its management board. “While it’s pretty competitive, it’s attractive if you are well positioned.”

The market is also at a tough point in the cycle. Prices for motor insurance — one of the biggest lines of business — have been falling and are failing to keep pace with rising claims costs. 

“The last thing you need in the market is another big balance sheet pushing for a growth strategy,” said Jonny Urwin, an analyst at UBS.

Some insurers have decided that they have had enough. Co-op sold its underwriting business to Markerstudy this year. Legal & General has followed with its Allianz deal. Saga has stuck with the market but has had to radically shift its strategy

“It seems like an odd time for the [Allianz] deal as the market is going through a tough patch,” said Mr Hossain. “But they are very smart, highly focused on returns and very disciplined on M&A. They wouldn’t put that reputation at risk.” 

Mr Peiris said Allianz’s first priority was to integrate the businesses it has bought. “The first thing is bringing the UK group together. We’re working our way through that now. There is a big benefit in sharing common functions.”

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Later, the focus will be on applying some of the Allianz group’s systems and processes to the UK business. In particular, said Mr Peiris, there was a “significant benefit” from using what Allianz calls its customer model — a way of simplifying and harmonising products across the group.

Analysts expect the company, which has a reputation for sound underwriting discipline, to be cautious on pricing, at least in the short term. 

But they said that as Allianz starts to integrate the various UK businesses into its own systems, it could gain a big cost advantage over its rivals. 

Mr Urwin said some parts of Allianz’s business operated with an expense ratio — costs as a proportion of premiums — of just 10 per cent. He said that some smaller insurers in the UK operated with an expense ratio of more than 30 per cent. 

“If you have a 20-point advantage that you can use for price, you can take market share quickly,” said Mr Urwin. 

Mr Hossain said companies in the UK market were now facing a choice: “You either have to be specialist or large. Ultimately, you will have consolidation in the market, but it will be from a point of weakness not a point of strength.”



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