Policy for change: An overview of Scotland’s insurance industry

By Ian Fraser

Scottish Financial Services Yearbook 2007

November 12th 2007

For decades, the insurance industry in Scotland has been the backbone of the nation’s financial strength and prolonged success. And, given the nature of its products, which are designed to give people peace of mind, it is paradoxical that the industry itself has had to face an uncertain period.

The threats have largely been linked to ownership: the vast majority of the Scottish-based insurance players are now owned by companies from outside Scotland – and they are therefore potentially highly vulnerable to the “branch economy” syndrome.

We saw this recently when “zombie” fund consolidator Resolution recently outsourced the administration work it carries out at Glasgow’s St Vincent Street to Capita, which saw 1550 staff transferring their contracts of employment to Capita. And in a similar vein, earlier this year it became clear that London-based Prudential is planning to make major job cuts at its Craigforth, site near Stirling, once the headquarters of Scottish Amicable.

The uncertainty has been intensified because the insurance sector has recently entered a major bout of consolidation, with Royal London (which operates under the Scottish Life and Bright Grey brands in Edinburgh) in merger talks with Liverpool-based Royal Liver, and Resolution, which has significant operations in Glasgow, seeking to push ahead with a planned £8bn merger with Friends Provident.

The other question mark hanging over the sector is whether Lloyds TSB might eventually sell Scottish Widows. The £1bn sale by the London-based bank of its Abbey Life assurance business is seen as having repercussions for SWIP, which manages Abbey’s funds.

Colin McLean, managing director asset management group SVM, says: “There are big pressures on Lloyds TSB, in terms of its regulatory capital, to find some solution for Scottish Widows – releasing some capital out of it. I think Lloyds has to either joint venture or sell. They have to resolve this capital issue at some stage before 2010 [which is when new capital requirements come in under Basel II].

McLean added: “Scotland and Edinburgh depends a bit on these life offices. Lloyds might well find a solution that recognises the value of the investment team at SWIP and the life company operation in Edinburgh.”

The brightest hope for the life sector – partly because it is the only player of any scale that remains independently managed from Scotland – is Standard Life. On August 7th the former mutual revealed a big leap in interim profits to….. .

Standard Life has been transformed since it came near to the brink of collapse in January 2004, and its stock market flotation in July last year has proved a huge success. In full-year results last March, Standard Life said 2006 operating profit came in at £614m on a European embedded value basis, topping the analysts’ consensus of £497m.

However, the reinvention of the Lothian Road-based company into a profitable plc focused on providing investment products, wraps and SIPPs, has not been pain-free. Chief executive Sandy Crombie has had to administer some painful surgery, including the axing of 4,000 jobs since he took over as chief executive two and half years ago. At the results announcement in March, Crombie said Standard Life was planning a further 1000 job cuts, even though UK jobs have already been slashed to 8,500 UK jobs. This was intended to shave £100m off its cost base by 2009.

Aegon proves that overseas takeovers do not have to spell bad news for Scottish-based insurers. When Scottish Equitable demutualised with investment from Aegon in 1994, the group had 1200 employees in Edinburgh (and 1800 across the UK) This has since risen to 3000 in the Scottish capital (and 4500 across the UK).

The group’s sales of life and pension products have nearly doubled on an annual premium equivalent basis over the past four years – from £588m in 2002 to £1.06 billion in 2006.

This has been achieved through a diversification away from the group’s former core business of pensions and the building up of business in other sectors including annuities, bonds and protection.

In general insurance, the subsidiaries of Edinburgh-based banks including HBOS’s esure, which is based in Glasgow, and Royal Bank of Scotland’s Direct Line are probably pretty secure, as are Aviva/Norwich Union’s 3,400 claims handling and administrative jobs in Scotland. These are mainly based in offices in Perth, Glasgow, Dundee and Bishopriggs. The RBS Group also owns Churchill Insurance and has a significant stake in Tesco personal finance, which has operated out of Edinburgh.

General insurance has increasingly emerged as a price-sensitive commodity, rather than the purchase of a recognisable household brand. The increasing use of internet price comparison sites, such as Moneysupermarket.com, Uswitch and Confused.com, has put severe pressures on traditional players with their larger overheads.

Jim Spowart, the founder of Intelligent Finance and Standard Life Bank, and now chairman of Peopleschampion,com, a Scottish price comparison website, said: “The general insurance market is changing rapidly. First it was the phone with Direct Line, now the internet has changed the dynamics.

Insurance has become more of a commodity with people buying easily online. This has forced the bigger players to look at how they market their products across the UK. It has led to a lot of niche brands appearing that are often underwritten by the bigger players, for example, Swiftcover, an online insurer, has been bought over by AXA.”

Increasingly consumers have been buying home and motor insurance on-line, which has pressed margins. Customer service and response has been seen as the way to retain customers with more companies looking closely at rewarding those who drive more carefully or find homes that are out with designated trouble spots.

An edited version of this article was published in the Scottish Financial Services Yearbook 2007. Although written in August 2007, the article was not published until November 2007 owing to delayed printing of the SFS Yearbook.

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