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Monday, 21 February, 2000, 12:41 GMT
Insurers braced for shake-up

Norwich Union headquarters The Norwich Union/CGU deal will spark more mergers


News of a merger between Norwich Union and CGU serves as a wake-up call to the UK insurance industry.

Their merger was prompted by the internet, which is turning the financial services industry on its head.

The fear is that consumers will flock to cheap web competitors. With share prices already hit by the feared impact on profits, the fragmented UK industry could make easy pickings for European predators.

The deregulating European industry also offers opportunities for UK companies, but only if they are large enough to compete.

Prudential hq Prudential led the way with interent bank Egg


The question now is who will be next?

Braced for change

The first round of consolidation in the insurance sector began three years ago when Royal Insurance and Sun Alliance merged to create Royal & Sun Alliance.

The following year, Commercial Union merged with General Accident to form CGU. Norwich Union then bought London & Edinburgh.

Now, CGNU has 19% of the market. Its deal leaves some of the smaller insurance companies on edge.

Already, shares in Royal & Sun Alliance have jumped 5% to 370 pence on merger hopes.

Legal & General - which originally hoped to merge with NatWest - is also said to be wondering what its next move will be.

United Assurance Group has already said it is in talks with Royal London Mutual Insurance

The spoils for successful insurance companies are huge.

Last year, insurers' new business in the UK totalled 40bn, a 21% increase on the previous year.

The opportunity to cut costs by merging is also large.

With its last merger, CGU achieved cost savings of 300m a year. This deal should bring in 250m of savings a year.

The European dimension

The fear for UK companies is that if they don't merge, they could be vulnerable to takeover by one of the European insurance giants.

Last year French insurance company AXA bought Guardian Royal Exchange.

The real challenge for the new company lies outside of the UK.

"The drivers for the merger are rapid change in financial services worldwide," chief executive of CGU, Bob Scott, admitted.

The new company will rank fifth in Europe - behind Axa of France, Allianz of Germany, Italy's Generali and Zurich of Switzerland.

As governments across Europe dismantle the welfare system, the private sector is stepping in to fill the gap by offering insurance and savings products.

Many pundits see life insurance as a growth industry of the 21st century.

"We want to be able to capitalise on that opportunity," Mr Scott said.

If it decides to expand further, it will likely be in Europe, he admitted.



Bancassurance?

As recently as last September, many thought that the way forward for the insurance sector was to merge with banks.

The birth of UK bancassurance was hailed when NatWest and Legal & General proposed to merge.

If it had happened, NatWest could have tapped into the lucrative life insurance market, while Legal & General could have sold its products through NatWest.

What happened instead was a bitter battle for NatWest between Royal Bank of Scotland and Bank of Scotland.

Pundits now say that the complexity of the UK pensions market has meant that UK banks are less likely to take the bancassurance route than their European counterparts.

Simpler pension products in Europe means that it is easier for banks to enter the market, hence the growth of bancassurance companies in Europe.

Some banks may still be shopping for insurance companies. Barclays had previously been tipped to be considering buying Norwich Union.

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See also:
10 Jan 00 |  Business
Internet 'to transform finance'
12 Jan 00 |  Business
Banks prepare to sell new pension
17 Feb 00 |  Business
Halifax to offer online insurance
18 Feb 00 |  Business
IF joins Egg, Smile, Cahoot
21 Feb 00 |  Business
Paying the price of a merger
05 Sep 99 |  The Company File
Banks shop for life companies
14 Sep 99 |  The Company File
Italian insurance giant in merger bid

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