Commercial Union to slash costs by pounds 100m

Commercial Union unveiled a pounds 100m cost-cutting programme yesterday in a bid to face down the growing threat from the direct telephone insurers. Acknowledging that it needed to raise its game in an increasingly cut- throat market, the group promised it could push through the improvements with no compulsory redundancies.

Analysts welcomed CU's attempt to catch up with new entrants to the general insurance market but questioned the lack of detail provided by the company. They said management was unclear who would benefit from the cost improvements and said there was a concern that the savings would be eaten up by the lower premiums needed to maintain market share.

The company said yesterday it would deliver "significant added value" but refused to break down how much of the savings would go to customers in the form of better prices, how much would be reinvested in the businesses, and how much shareholders would see in higher profits.

Peter Rice, a director of the general insurance arm, said yesterday the measures would slash CU's ratio of expenses to premium income by cutting pounds 40m from the cost of dealing with claims, generating a similar saving from better management and a further pounds 20m from more profitable underwriting.

He said CU had been working on the programme, dubbed "market orientation", for the past two years. The proposed changes, which would rely on natural wastage to reduce staff numbers, were agreed with unions. About 1,000 of CU's 5,500 staff leave each year.

Analysts said the moves were CU's response to a fast changing insurance market that has seen new entrants such as Direct Line attack the traditional players' markets with the benefit of lower cost bases and more efficient systems.

General insurance, which includes commercial, household and car insurance, has seen tough competition for several years, with insurers desperate to find new ways of winning new customers and squeezing profit from businesses struggling with persistently low premium rates.

The changes, analysts said, reflected a realisation by the industry that insurance companies were regarded by the stock market as poorly managed businesses and rated accordingly. Although CU is considered to be one of the best managed businesses in the industry, it admitted yesterday that continuing to do things in the same way was not an option.

Mr Rice said the pounds 40m of supply chain savings would be achieved by aggregating a series of small changes. These would involve better systems to prevent overpayment of claims, better purchasing of replacement goods such as carpets and white goods, and better partnership arrangements with loss adjusters. Litigation is to be consolidated into a small number of offices.

He said, however, that there were no plans to copy Royal & Sun Alliance by outsourcing the handling of claims on its household account.

Andy Homer, managing director of the UK general insurance business, added: "We're trying to drive out the wasted cost that's built into an industry that does a lot of its transactions by paper."

The reorganisation also entails changing the head office into nine new business units which focus on different areas of the market.