The insurance industry in the UK has undergone a level of consolidation probably unmatched by any other sector. In the past five years the pace of change has been nothing short of startling.
In 1996 the Royal Insurance and Sun Alliance joined to form the Royal & Sun Alliance (RSA) in a multi-billion pound deal. In February 1998 the Commercial Union and General Accident combined to form the CGU in a £14.2bn deal.
A year later, in February 1999, Axa snapped up, through its UK subsidiary Sun Life, the independent insurer Guardian Royal Exchange (GRE) for £3.5bn, which had bought out the PPP healthcare business for £435m less than 18 months previously. In 2000, less than three years after it was created, CGU struck a £20bn deal with Norwich Union to create the UK’s largest insurer, CGNU.
There have been other major deals beside these and the trend is not expected to stop there. For a large part of last year and this, the RSA has been widely tipped to become the next takeover target, and many commentators believe the industry’s fragmentation leaves room for the creation of more European-based global players such as France’s Axa and Germany’s Allianz.
Working in such a rapidly changing environment and in such huge organisations as the leading players have become places tremendous demands on in-house legal departments.
Across a multi-billion pound business, the pressure on an in-house legal team to justify its existence is arguably greater than ever. It is certainly much more difficult for a legal function to make its presence felt.
“It has been a period of change and uncertainty,” concedes Kirsty Cooper, director of group legal (London) at CGNU, who says, in their immediate aftermath, the mergers have generated a significant amount of disposal work for the 10-lawyer central corporate team. Two members of the team have just completed the £2bn sale of the company’s US interests.
One of the major challenges, that of ensuring a uniform approach to certain areas of legal risk, cannot be easy across a group the size of CGNU, which has more than 70 lawyers.
“There has to be an element of central control,” Cooper says, “although we try to assist and help rather than to impose on them.” But, she adds, it is essential to have central control when it comes to regulatory compliance, competition, high-level litigation, whether in terms of money or reputation, and large corporate transactions.
Like CGNU, the Axa business in the UK has had to cope with the major changes brought about by deals such as the GRE and PPP purchases.
“Having brought together different businesses over a relatively short period of time, Axa UK is now trying to draw out the benefits of consolidation across the group,” says senior legal adviser Edward Davis. “We are so involved across the business, we can facilitate the business talking together.
Playing an active part in the general commercial activities, including new product development, of the various operations such as the Bristol-based life business and the Tunbridge Wells-based healthcare business, is also extremely important and is reflected in the new structure of the Axa legal team.
“The key thing we have been trying to do is develop the sort of relationships with the business that counter any sort of suspicion or suggestion that we are a centralised, ivory-tower legal team,” says Axa Sun Life’s Davis. “In order to do that, we are particularly active in getting out into the business to break down any reluctance.”
One significant initiative introduced by Axa’s legal team is the practice of weekly surgeries, where members of the department visit the businesses they are responsible for. “Ideally, people are not sat at their desks at the head office if they can be out and about,” says Davis, explaining its purpose. “We try to get out, even when there is not a specific piece of work – we encourage people to get out and be visible.”
But the need to create a consistent approach and to raise internal clients’ awareness of the legal team’s skills has not been the only major challenge.
The competitive environment – created by the intense rivalry between insurers and the arrival of new entrants into the market such as the banks – has in turn led the insurance companies to diversify in order to compete.
New areas of business such as alternative risk transfer structures, the interface between the insurance and capital markets, provide additional challenges and expose the companies to alternative regulatory regimes from those to which they are accustomed. And, more importantly, the sheer size of the leading insurance groups has meant an increasing interest among regulatory authorities in their activities.
“The general insurance business is becoming more heavily regulated – it is going the way of the life business,” says the CGNU’s Cooper. “I would not say it is intrusive, but it is more intensive.”
The creation of the Financial Services Authority (FSA) as a single super-watchdog, when insurance companies previously had several regulatory authorities to deal with, has been broadly welcomed.
But there is significant concern at the way the new Financial Services & Markets Bill is developing. “The bill is bringing in a lot of new legislation and regulation – it is something we have to be very conscious of,” Cooper says.
Another developing area of regulatory control is the new General Insurance Standards Council (Gisc). A voluntary body, Gisc was launched in June 2000 and its codes of conduct cover a wide range of general insurance products such as motor, household and private medical insurance.
While the life industry has been subject to this type of regulation, indeed something much more stringent, for years it is new to the general market.
“It will create much more of a compliance culture and box-ticking and it is not something most London market brokers are used to,” says Jane Owen, head of legal in the UK for the world’s second largest insurance brokerage, Aon. “We understand and appreciate what it [GISC] is trying to do, but not everyone is sure that we are going about it in the best way.”
Gisc, which will monitor sales and advisory practice like an ombudsman bureau, will have the power to award compensation to customers and fine insurers or brokers for failing to honour a contract or for giving bad advice.
For now, though, there is general approval of its aims among the major players. “What I do like is that it is taking a more pragmatic view than its predecessors,” says one head of legal, who asked not to be identified. “In principle, it understands proportionality and is prepared to take into account market conduct. It has been relatively sensible.”
But, he warns, as yet there is little sign of any strong action being taken. “Apart from the codes of conduct, we do not know yet how it will turn out. Gisc has not yet flexed its muscles, but I hope it is going to be firm when it has to. If it is a pushover, it will be a disaster,” he says.
A much more regulated business is set to become a fact of life, but there are fears that the regulatory burden will grow and grow.
“Gisc is self-regulatory,” says Cornhill’s head of legal, Chris Kiddle Morris. “But no doubt it will be sucked into the FSA in the fullness of time.”
Mediation
For everyone in insurance, litigation is a fact of life. Although in-house teams are adopting a more proactive role than in the past – looking to anticipate problems rather than just picking up the pieces – disputes are inevitable.
With insurers taking an increasingly tough approach to claims, brokers are finding that it is taking up more time and effort to resolve the ensuing problems.
For many, the availability of alternative means of dispute resolution, such as mediation, is very attractive.
Aon’s head of legal, Jane Owen, is a keen advocate, although she points out that it is “not a panacea”.
“We take a pragmatic approach to such matters and have used mediation quite a lot,” she says. “We are in favour of mediation if used sensibly – litigation is such a ridiculous way to solve a problem. But you can find that complex mediation becomes almost as expensive as a trial.”
Another broker’s head of legal, who asked not to be identified, agrees. “With mediation you never lose, even if you do not settle,” he says, pointing to the benefits, including the protection of the on-going relationship. In a traditional adversarial situation this would more often than not fall by the wayside.
But he warns that it does not work for every kind of dispute. “In mediation you have to accept that you are compromising in some way,” he says. “But there are situations where you feel you should not be paying anything at all. Mediation is only suitable for genuine disputes, where both sides feel there is some vulnerability.”
Another advantage, he adds, is the continuing and active involvement of the business teams. “The crucial thing,” he adds, “is that the clients control it. Business people initially find it a rather stylised form of negotiation, but by the end they find it useful. They are masters of their destiny.”
Owen agrees that as a legal department it is important not to dominate the whole process. “We can be very tough, but we always have to make sure we do not take ownership of problems which must remain with the business,” she says. “The businesses should not try to wash their hands of it.”
