For a company that still uses something as archaic as a 1970s-style home telephone as its logo, it’s easy to forget how innovative Direct Line once was.
Founded in Croydon in 1985 by the Royal Bank of Scotland executive Sir Peter Wood, it took motorists by storm with its no-nonsense formula of selling car insurance by phone only, cutting out the brokers who dominated the sector.
The red telephone on wheels, which first jangled in 1989, became a staple on TV screens for years, while Wood also pioneered something else never seen in Britain: the call centre.
Scores of staff in the Croydon offices sat taking applications by phone. “We simply decided to use the phone instead of people behind counters,” Wood was later to recall. “It was pretty revolutionary, and it cut so much time and money, that’s why it took off.”
Business boomed for years, and Direct Line soon expanded into breakdown, pet and travel insurance as well as launching a web-based service in the 1990s. Wood eventually fell out with his masters in Edinburgh, going off to found a second direct car insurer, ESure. By the late noughties, Direct Line was by some measures the biggest motor insurer in Britain.
The music stopped for the company with twin blows in 2008: the RBS blow-up under Fred Goodwin, when the bank had to be rescued with £45.5 billion of taxpayer money, and a brutal turn in the insurance cycle.
The Direct Line division, which also owned Churchill and Privilege Insurance, went into a squealing reverse from operating profits of £626 million in 2007-08 to losses of £223 million in 2009-10 as insurers were hit by a barrage of bodily injury claims: it was the era of sometimes spurious whiplash claims.
Another embarrassment was a £2.17 million fine from the Financial Conduct Authority after Direct Line managers improperly pressured staff into tampering with customer complaint files to make the company look better to regulators.
Worse was to come. The European Commission ordered RBS to sell a number of prized assets, including Direct Line, as the price for receiving state aid. RBS floated the business on the London stock market in 2012 with an issue price of 175p.
Under its new chief executive Paul Geddes, a former Pampers account manager at Procter & Gamble, the company initially prospered and entered the FTSE 100, but from 2017 the pressures worsened and the shares faltered from their 400p peak.
Penny James, a former Prudential executive, succeeded Geddes in 2019 and the company’s troubles deepened. Fears of a crackdown on insurers favouring new customers over loyal ones overshadowed the sector. James was accused of being too slow to lift premiums in the face of rocketing car repair costs and left in January 2023 after a profit warning and the axing of the dividend.
• Direct Line admits overcharging loyal customers by £30m
Her permanent successor Adam Winslow, a former Aviva executive, has so far struggled to return Direct Line to its glory years in spite of some success in pruning costs. Two bids from the Belgian insurer Ageas were batted away.
Some customers today complain of terrible service as a result of the greater reliance on chatbots and the abandoning after 40 years of Woods’ trailblazing innovation: plenty of human beings to answer the phone.
Q&A
What would any merger mean for my car insurance premium? That is precisely the question likely to be asked by regulators including the Competition and Markets Authority as well as ministers. Sharply rising premiums over the past two years have angered motorists, so any suggestion that a takeover could increase Aviva’s power to push up prices further would be politically sensitive.
A promise “to support drivers by tackling the soaring cost of car insurance” was in the Labour manifesto. A new government-sponsored task force has been set up to tackle “the spiralling cost of motor insurance”.
How will regulators judge any deal? Market shares have traditionally been used to gauge how anti-competitive a merger might be. The price comparison website USwitch says Aviva is the second biggest supplier with 10.6 per cent of the motor market and Direct Line is No 3 with 10.3 per cent. Their combined 20.9 per cent would dwarf the 11.3 per cent share of Admiral, the current market leader.
The regulator normally sees 25 per cent as the threshold at which it would consider taking action. Car insurance is seen as relatively competitive, thanks to price comparison websites. A CMA investigation in 2015 led to some modest reforms, but largely left the market alone.
What do competition lawyers think? The creation of a hefty market leader would not necessarily worry regulators and the industry has a long tail of smaller providers to keep competition alive. Not everyone agrees with those market share figures anyway, with some saying Admiral would still be No 1 by gross written premiums.
Alex Haffner, a competition lawyer with Fladgate, said: “The CMA would undoubtedly need to look at it, but I don’t think the competition issues look insurmountable. Aviva will have done a lot of preparatory work to make sure they have their ducks in a row.”
Aviva, if challenged, could also try the “efficiencies argument” that its greater scale would drive down costs and lead to more competitively-priced premiums, one lawyer said. The CMA has recently looked quite favourably on mergers of substantial players, for example giving a provisional green light to the merger of the mobile networks Three and Vodafone.
What about the government? Ministers are concerned that premiums have risen much more than in comparable countries, but are for now focused on premiums for motorists who pay in instalments. The Financial Conduct Authority, which is investigating, says they are charged as much as 20-30 per cent more than those who pay the full annual premium. Twenty million motorists pay by instalment and 79 per cent of people in financial difficulties have used this option. Both Direct Line and Aviva offer the option to pay by instalment.
Are insurers making excessive profits from motorists? No. Rather the opposite, analysts say, at least until very recently. Insurers were quite late in raising premiums as car repairs, parts and replacement vehicle costs spiralled over the past two years. In 2023, the industry paid out £1.13 in claims and other costs for every £1 collected in premiums, EY said. It also made underwriting losses in 2022.
Many then lifted premiums very sharply. The Association of British Insurers, the industry body, says they have dropped by 2 per cent between the first and second quarters of 2024.
Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.