Growth also brought regional expansion with the opening of a sales and
claims office in Glasgow, followed by the opening in June 1990 of a further
regional centre in Manchester to service Northern England and Wales. The
original Croydon office continued to service the Southern parts of England
and Wales but the company moved to a new, custom-built head office in
Croydon in 1992. In November of the same year Direct Line also opened a
new regional office in Birmingham to service customers in the Midlands.
As planned, the company came into profit in its third full year of trading
and further profit gains were made in subsequent years. Details of the
growth of motor and home policy holders and in premium income are
shown in Figure 2.5.3. Direct Line had not, however, achieved the same
superior performance in its household business as it had in motor. The
company’s claims ratio had tended to be consistently higher than the
industry average although these figures fluctuated substantially from year
to year due to weather conditions, theft, subsidence and the like. In 1992,
while the industry average claims ratio for all property was 61 per cent
Direct Line could only achieve 73.4 per cent.
While most insurers lost money in underwriting motor and household,
they hoped to recover their position from profits made from investments.
As a result, such investment portfolios consisted usually of a mix of prop-
erty, equities and fixed securities. By contrast, Direct Line was extremely
conservative in its investment policy. Investments were therefore relatively
liquid and risk free, being held mainly in cash and deposits (£194 million
at September 1992), government securities (£22 million) and owner occu-
pied freehold properties (£18 million). Declining yields resulting from
falling interest rates had therefore reduced investment income. However,
the company argued that it did not wish to take risk on both sides of the
balance sheet, in both insurance and investments, and hence its policy was
to take only risk free investments.
The dramatic success of Direct Line had spawned imitators. The nearest
competitor was Churchill Insurance. Started by one of the co-founders of
Direct Line and operating in a very similar manner, this company had been
acquired by Winterhur, one of the leading Swiss insurers. Other recent
‘direct writers’ included Topdanmate from Denmark and Gan-Minster
from France.
The main casualties of Direct Line’s success, however, were the British
composite insurers who historically had sold their policies through
independent brokers. Direct Line, by bypassing the brokers, saved their
commission, which averaged 25–40 per cent of premiums written. The
success of direct writing had spurred the composites to reply with a
variety of strategies. Some had responded by tightening their links with
those brokers who obtained the best quality business for them. Further,
they had stopped accepting policies from brokers whose business pro-
duced higher than average claims. One problem in this strategy of broker
The customer market domain: Managing relationships with buyers 115