The challenge for RBoS positioning the Direct Line IPO

On one level, selling Direct Line in an IPO looks straight forward. The business model is proven and is made up of strong, well established brands. It is the leading UK personal lines insurer with a 19% market share in motor and 18% in home, which equates to 4.2 million personal motor and 4.3 million home in-force policies.

It would be a mistake, though, to assume that an established client base and a set of strong brands are enough on their own. The UK P&C insurance market is undergoing major change and can be ferociously competitive. The disruption caused by the comparison web sites (Go Compare, Money Supermarket.com, etc…) is well known but Google’s entry into the UK&I insurance price comparison market last week indicates how tough things could get. Google has mixed track record with its acquisitions, but the financial power and potential disruptive capability should not be underestimated.

In the meantime, the main impact of the price comparison sites has been twofold. The comparison sites use of TV advertising has driven consumer to the comparison portals and away from direct purchase from providers. This has substantially weakened the pricing power of the insurance providers and their brands.

The Direct Line brand of RBS has attempted to counter this by advertising that the best deals are only available direct but this seems to have had limited effect. The comparison site business model allows for a lot of advertising spend. In 2010, according to the Insurance Post, Go Compare reported a turnover of £101.5m and a pre-tax profit of £30.1m (on a volume of 28.5 million insurance quotes), which is a healthy margin when you run the business with 94 staff and can annually spend £20m+ on TV advertising. Of course, Go Compare is only one of the four large comparison sites all of whom spend similar amounts on advertising, so for RBS Insurance to be heard amidst all the other insurance marketing noise is a fundamental challenge. This advertising competion places considerable financial demands and of RBS Insurance's £846m annual costs, £200m is marketing spend. Tellingly, this has had to be kept flat when every other area of cost has been reduced.

So where are RBS Insurance’s strengths?

Despite the challenging UK market, RBS Insurance has several strengths. The brand and the install base are givens, but applied correctly the experience the company has gained in the UK market could be a significant advantage.

Perhaps one of the biggest advantages RBS Insurance has is the skills of its contact centre agents. While much of the market has focused on the web channel (and had the associated brand and cost pressures), RBS Insurance still retains significant on-shore contact centre with experienced and skilled staff. The telephone channel may have only a fraction of the web channel‘s sales volume, but I would be very surprised if RBS did not have a far better closure rate on the telephone. A careful reading of some of the reporting suggests that it also has a good upsell and cross-sell rate, something far more easily done by an agent during a conversation than on a price comparison site. The upsell of rescue, guaranteed hire car and similar offerings accounted for 4% of the Net Earned Premium in 2010. Impressively, the cross-sell rate at the Direct Line brand ensures that 53% of customers who have home insurance also buy motor insurance from the same provider. This is higher than the industry average and still leaves room for significant growth.

In short the telephone sales channel may cost more and have smaller volumes, but it may be more profitable than the price war that is fought in the web channel.

The other area of strength for RBS Insurance is international. While the UK is generally estimated as Europe’s second largest P&C insurance market, few other markets are as competitive. RBS Insurance in the number one direct insurer in Italy and the number three in Germany.  Europe may not always be associated with high growth, but even moderate share gains in main land Europe offer significant opportunity.

The pricing is obviously key, but beyond that whether the IPO is successful depends greatly on how RBS Insurance is positioned. Too much focus on the past or the current UK market will highlight the considerable challenges; too much focus on the growth areas may fail to show the genuine strengths of the RBS Insurance business.