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Straight talking

Direct Line started a revolution in the general insurance sector. Can Royal Liver do the same for life insurance with its straight-through processing model?

Direct Line launched in the UK 20 years ago and revolutionised the way that people bought general insurance.

Its phone-based direct-sales approach, with the promise of lower premiums, was emulated by other providers, replacing the traditional high-street insurance broker as the preferred method for consumers to buy general insurance products.

Direct Line led the revolution but the seeds had already been sown by declining stockmarkets savagely cutting into the profit margins of UK general insurers.

Providers using the combined ratio to measure potential profit had for years faced premiums totalling less than payouts – for some time, the combined ratio stood at 108 per cent, meaning that for every 100 in premiums, providers had to pay out 108 to settle claims. On the surface, this may seem an insurmountable problem but providers invested surplus funds in the stockmarket and gains offset paper losses.

However, when the stockmarket faltered, this profit generator vanished and providing general insurance became a very risky proposition. The industry had to cut costs and the direct-selling approach championed by Direct Line was seen as the way forward.

Twenty years on, the general insurance industry has successfully made the transition to an electronic processing-dominated model but the same cannot be said of the life insurance sector. It is facing the same pressures that confronted the GI sector in the early 1980s and a similarly radical solution is emerging.

Sandler and the pressures of living in a 1 per cent world are placing considerable pressure on the profitability of the life insurance sector and providers have to find ways to cut costs while still maintaining service quality if they are to prosper in the long term.

Straight-through processing has been seen for some years within the life and pension industry as a route to cutting costs, boosting efficiency and re-engineering the way that providers operate internally and with intermediaries.

Again, this runs parallel to the general insurance industry in the 1980s when technology also played a central role in bringing change.

In the 1980s, the problems associated with having a high cost base had been debated throughout the GI market. The direct-sales route was hailed as providing a way forward for the industry as it provided a foundation to building a new lower-cost business model. However, most general insurance providers were slow to adopt this approach, providing Direct Line with the opportunity to expand its market share rapidly.

The current situation facing the life insurance market is similar. Using STP to cut costs and boost efficiency requires a portal as the interface with brokers and IFAs.

The leading provider in the market is The Exchange and it is working with all the established providers and some of the newer entrants. The advantage that these new life insurance providers have is that without legacy systems getting in the way, they can use STP as a route to building a low-cost business model.

One of the latest entrants is Progress from Royal Liver which launched into the IFA market with an STP proposition powered by Marlborough Stirling. The STP model enables Progress from Royal Liver to offer IFAs competitive protection products coupled with efficient and consistent service.

Within the first two weeks of operation, Royal Liver was able to offer a two-hour turn-round covering application input, automatic underwriting, acceptance and issue within minutes, with next-day turn-round on commission.

The industry anticipates that STP will become an accepted reality. The Exchange recently surveyed intermediaries from 300 companies and found that 55 per cent believe they will be conducting most of their business electronically in five years.

Direct Line and Royal Liver are similar in that hey launched into new markets as unknown quantities with new business models and they both changed, or in the case of Royal Liver is changing, the way in which insurance providers operate.

Both launched their operations under the noses of bigger providers which had discussed adopting new technology to reduce costs but were slow to act. Direct Line provided the stimulus which sparked the revolution in the GI industry and Royal Liver could do the same for life insurance.

Bigger companies often appear to be slower to adopt change and new technology perhaps because they have deeper pockets and can afford to wait for someone else to act, prove that the technology works and convince IFAs and brokers to use it.

Providers will act when they see a proven technology helping new entrants to take market share from them and this was the stimulus for action in the 1980s.

Straight-through processing provides the blueprint for change in the life insurance market. The next revolution has started.

Although Royal Liver has only recently opened its door to business, it could spark a similar change in the life insurance sector, as Direct Line did 20 years earlier. As it gains market share and grows in size, established providers will feel compelled to emulate its STP model to remain competitive.

Steve Butcher, Marketing director, Marlborough Stirling

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