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Business Comment

James Moore: Direct Line – just what the world needs [not]

Outlook Just what the world needs, another insurance company. This morning Royal Bank of Scotland (RBS) will likely push the button on its long-awaited flotation of Direct Line.

This was a business that did things differently, at least when it was set up. Part of its success was cutting out the broker and selling direct to the public. Part of it was down to some inspired marketing.

But there was more. Insurers are renowned for dragging their feet when it comes to dealing with claims, which is why people don't like them very much.

When Direct Line was founded as a telephone-only operation by entrepreneur Peter Wood it did the opposite, processing and closing claims very quickly, leading to it becoming – from a standing start – the biggest motor insurer in Britain in less than a decade.

Not only were its policies competitive, customers found that they were dealt with quickly and efficiently in stark contrast to the way other insurers behaved at the time.

Mr Wood didn't adopt this policy out of the goodness of his heart. It was based upon sound, financial logic. As the claims process drags on costs inevitably rise – and rise and rise. Direct Line's rivals were not only infuriating their customers, they were shooting themselves in their financial feet. Again and again. It's a lesson large parts of the industry still haven't learned.

The formula continued under RBS's ownership while Mr Wood stuck around but the relationship ultimately soured, not helped by a controversy over his chunky pay packages. And then it all started to go horribly wrong.

Direct Line's reputation as the best insurer on the block also soured. In recent times it hasn't made much money while its reputation for quality has taken something of a knock. Just put "Direct Line" and "Claims Handing" into Google. Or wait until you have to make a claim (I have).

Will the company recover after being liberated from the dead hand of RBS? The newly independent business (which also owns Green Flag and Churchill) is set to axe nearly 1,000 jobs as part of a cost-cutting drive. These always seem to do more to benefit executives (through bonuses) than consumers. In other words: Just what the world needs, another insurance company.