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Short term Industry
Tuesday, February 1, 2005
Rates continue to soften

First Link thinks falling commercial insurance rates will continue well into next year. This follows the previous three years of hardening rates in the commercial, personal and corporate books of business.
As First Link CEO, Keith Young notes, “In commercial lines, the soft market-cycle has already begun. Significant rate cuts are being reported by our field staff.”
A key First Link prediction for 2005 is that competition around rates will intensify strongly. However, competition faced by brokers from direct insurers may soon plateau, according to First Link’s strategic industry overview. Mr Young points out, “The direct channel is relevant for certain market segments, but we do not foresee significant losses. We estimate that direct insurers currently hold 10% to 15% of personal lines business, but we don’t anticipate much growth beyond 20%.
“Significantly, Auto & General, a leading direct player, has now refocused its strategy to pursue broker-driven growth.
“Our research indicates that the broker model is well able to compete.”
The research carried out shows that First Link’s combined personal and commercial lines business grew in 2004 at nearly two and a half times the rate achieved by the three leading short-term underwriters. In 30 months, it has bedded down no less than nine acquisitions. Three more are imminent.
Mr Young’s strategic overview for 2005 also highlights continuing insurance industry consolidation as a strong trend. “This will take various forms – acquisitions, mergers, partnerships and alliances.
“In 2005, FAIS (the Financial Advisory and Intermediary Services Act) enters its first full year. The new legislation is itself an important driver of consolidation.”
FAIS requires meticulous record-keeping, stringent compliance procedures and on-going staff training. The net-effect will be to drive up costs for the entire industry. First Link believes some players will respond by combining resources or seeking well capitalised partners; some may exit the industry.
However, he does not foresee a FAIS-triggered staff shake-out in 2005. It will be 2006/07 before the impact of training requirements and resultant accreditation hits home. Industry members have two years to achieve the credits necessary for personal lines compliance and three years for commercial lines compliance.
He adds, “First Link programmes will ensure 100% staff compliance well ahead of schedule. Some brokers have embraced FAIS as a means of improving service standards and have moved quickly to put programmes in place.”

Copyright © Insurance Times and Investments® Vol:18.1 1st February, 2005
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