Independent Thinking.

Catering to a small cadre of brokers has bred success for Scotland's Independent Insurance Group.

Drop into a regional customer meeting of Independent Insurance Group plc, and the intensity of the achievement-oriented enthusiasm served up from the podium smacks of an Amway rally. The small, public company based in Glasgow, Scotland, exudes an almost fanatical zeal for insurance, an everybody-always-selling attitude and a near-religious focus on the fundamentals of underwriting.

The approach is working. The vaunted "Independent Difference" has led the company to significantly outperform its competitors since it was founded in 1987 from the ashes of All-state U.K.

"Independent is one of those rare birds, the only one we have ever spotted in the U.K., that consistently produces superior underwriting results," said David Hudson, an analyst with HSBC Securities in London. "It actually understands the insurance business, and I don't think a lot of the other big companies do. It is all about understanding risk, assessing risk and setting an adequate rating against risks. Independent consistently proves that they can do it better than anybody else."

Michael Bright, Independent's charismatic chief executive, succinctly explained the secret of his company's success: "We focus entirely on our trade." The philosophy shows up throughout the organization, led by an unyielding determination to underwrite only for profit. "We have no interest in market share or investment income," Bright said. Independent, primarily a U.K. commercial property/casualty carrier, underwrites each risk "on its merit," employing about 120 risk-control surveyors who inspect every risk written. "We don't accept brokers' surveys as gospel," Bright declared.

Yet brokers--referred to as "customers"--are the cornerstone of the Independent approach and key to its ability to avoid unprofitable business. Only about 2% of all U.K. intermediaries place business with Independent, and most have been representing the company for years. "We don't select many brokers these days," Bright said, estimating that only half a dozen agencies have been granted in the past three years. When Independent acquired the U.K. nonlife business of Allstate, it inherited an agency base of about 10,000. It has been reduced to slightly more than 1,000, with an "inner sanctum" of 200 to 300 brokers delivering the vast bulk of the business. Although it is the fourth-largest commercial underwriter in the United Kingdom, 85% of Independent's business comes from just 190 accounts.

"We fight hard for business when the market is in our favor, and in soft markets we rely heavily on the long-term nature and consistency of our business," said Andy Hawkes, executive manager of marketing. "A lot of our work now is aimed at persuading brokers that they need us in a hard market, and retaining relationships in the days of the new-friends syndrome," referring to the tendency of competing insurers to court brokers with enticing deals when market conditions turn. Thus, Independent's effort at managing customer relationships is targeted exclusively at brokers. The current message about "new hard-market friends" and the reliability of longstanding relationships is so distinct that the Independent name doesn't appear in its trade advertising.

Broker Club

In 1987, Independent pioneered the concept of the broker club, Bright's "inner sanctum," which sees the best-performing intermediaries rewarded through profit sharing. Most of the United Kingdom's major nonlife carriers have copied the model, making it an industry norm. But something about the Independent style and philosophy--not least the charismatic presence of Bright, who unlike other chief executives regularly meets with his "customers"--has made Independent's broker club somewhat more exclusive than the others. "We believe we have a big majority of the best professional commercial and national brokers, defined by profitability, not by how big they are. We deal with people, not letterheads," he quipped, voicing one of Independent's many catchphrase philosophies.

HSBC's Hudson praised Independent's broker club. "To be a club broker you need a long track record of bringing profitable business to Independent. The longer the track record, the better deal they get." He described the broker relationship as a trade-off: investing in brokers through incentives, new products and training yields their best business in return and delivers to Independent a much lower loss ratio than the industry norm. The same applies to the company's significant expenditure on risk assessment. "They spend a lot of time and money assessing each risk, making sure it is one they are prepared to underwrite," Hudson said. "Their expense ratio is somewhat higher than the sector average, but their loss ratio is a lot lower."

While all underwriters preach about shrinking their books in soft markets, Independent began doing so while other U.K. insurers were still ratcheting rates the wrong way.

"Our gross income has dropped over the past two years. We will shed business which does not offer the correct rate and, more importantly, the correct terms and conditions," Hawkes said. Independent was the first of many markets to withdraw from London energy, marine excess-of-loss and marine subscription business, in which it participates with other underwriters in a risk. It also was among the first to exit standard U.K. private-passenger automobile business. "It is the only company I know that actually practices what it preaches," Hudson said.

Keeping the Pen

Despite its close links with its best producers, Independent has never given its pen away. "We have never entered the broker binder market," Bright said. The underwriting approach is based as much on people as on risks and tends to avoid "accepted wisdom."

"We try to underwrite management more than anything. The physical risk is one aspect, but every time we'd rather have a manager that knows how to run his business and is concerned about health and safety," he added.

Long relationships are part of the formula. After the first half of 1999, 62% of Independent's book was locked into long-term policies of three or five years.

"If it is locked in, you can afford to spend on improving the risk," Bright said. "As we put more underwriting risk management control into place, the loss ratio falls." To encourage long-term relationships with insureds, Independent offers cash-back style bonuses, with the caveat that rebates must be spent on risk control measures.

At the other end of the spectrum, Independent has purchased a five-year, rolling-contract reinsurance facility that supports the underlying long-term policies. "We use six reinsurers who don't compete with us," Bright said. "And we think they should make money, too."

The book is dominated by commercial liability (44%) and commercial property (21%), with the remaining third a mixed bag of affinity group cover, high-net-worth homeowners, international business, auto and miscellaneous lines. "We are happy to continue writing liability business," Bright said.

Independent measures what it calls "true loss ratios" based on underwriting years, rather than revenue-based loss ratios, allowing ongoing risk control to show up in the results. In other words, claims impact the loss ratio of the year in which the business was written. "It is a focus on technical discipline," he said.

That focus is emphasized by Independent's non-reporting of "apportioned investment income" as part of its technical account, unlike the major U.K. insurers. Including a relevant share of investment income, Independent has made a profit every year since 1989. By its preferred measure, excluding investments, it suffered slight underwriting losses only during the darkest days of the last U.K. cycle in 1991 and 1992, almost all of which were from ill-fated stop-loss policies for Lloyd's Names.

Other current disciplines include a policy of reserving without discounting and of having a third-party actuarial assessment of reserving conducted annually. "We are not an investment trust," Bright said, adding that he would like to see third-party reserve assessments become standard practice. He said he believes the U.K. market is under-reserved by about [pounds]1 billion, or $1.6 billion.

Independent is cautiously taking its model abroad. In 1995 and 1996, it acquired French insurers La Palatine and SAFOM, and last year it opened start-up operations in Spain and the Irish Republic. The expansion is set to continue. "We are looking to buy a commercial or high-net-worth operation in France, but there are very few for sale," Bright said. It also launched a loss-adjusting firm that was honored as loss adjuster of the year. "That was to counter what we saw as appalling loss adjusting standards in the community at large, since we have to guarantee the services of the loss adjusters."

Adrian Leonard is a London-based correspondent.

Independent Insurance Group plc

Headquarters: Glasgow, Scotland

Chief Executive: Michael Bright

1999 Gross Premiums: $320.4 million

1999 Pretax Profits: $38.9 million

Ranking: Fourth-largest commercial underwriter in the United Kingdom.

Source: 1999 company report