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Insurance industry maps out conquest - by phone: Telesales look set to give insurers cheap and easy access to markets across Europe. Diane Coyle reports

THE European insurance industry is trying to adjust to a brave new world. The introduction of the third insurance directive has opened tightly regulated markets such as Germany and Italy to insurers authorised in other European Union countries, and telemarketing is attracting increasing attention.

Takeovers and joint ventures provide one route into foreign markets, but the establishment of a direct sales subsidiary offers a relatively cheap, and at least superficially, attractive alternative. Firms in Europe's most liberal insurance markets have shown that telemarketing can be hugely successful.

In Britain, there are half a dozen competitors. They are led by Direct Line, owned by Royal Bank of Scotland, Churchill, a subsidiary of Switzerland's Wintherthur, and Admiral, the Lloyd's of London direct motor insurer. In the Netherlands, telesales are dominated by Centraal Beheer.

Telemarketing in these countries began in the early 1980s. Now other European insurers are about to follow suit. Tellit, owned by Groupe Suez and operating in Germany and France, was launched last year. Zurich, the Swiss giant, announced earlier this year that it would establish direct distribution channels across Europe.

Other insurance groups, including the UK composites and big Continental players such as UAP of France and Italy's Generali, are also exploring cross-border telesales.

'There is going to be a huge battle for the consumer,' one insider says. 'Any group that wants a European presence is putting resources into telesales.' He thinks the UK firms' home experience will give them a big advantage - his own group expects to be operating in Germany by 1996.

Generali, Italy's biggest non-life insurer, is planning new direct distribution methods, including telemarketing and direct mail, in its home market.

Italian insurance sales are dominated by local agents and small regional brokers. The abolition of regulated tariffs by the third insurance directive is creating the opportunity.

Direct Line, Britain's biggest telephone insurer, says it has no immediate plans to expand on the Continent. It has, however, been approached by several Continental insurers suggesting joint ventures.

At a recent conference in Paris, direct sales - and the success of Direct Line - were singled out several times by Jacques Friedmann, chairman of UAP, the biggest French insurer, as likely to be a key trend for the industry during the 1990s.

IBM, which recently commissioned research on telemarketing for its insurance company customers, forecasts that sales from telemarketing in Europe will jump from dollars 2.2bn to dollars 7.6bn by 1998. The prediction is based on a survey of big insurers' own plans.

Germany, once tightly regulated with minimum premium rates in the past, is still the most tempting market. It is also Europe's biggest market. Italy comes a close second.

The advantage of teleselling straightforward products such as car insurance or household contents policies - which are likely to take the Continent by storm in the next decade - is the low costs involved. Direct Line's overheads are only around pounds 15 for every pounds 100 of commission income earned, less than many rival insurance companies which sell through brokers. They then have to add broker's commission - 15 to 20 per cent of the premiums involved - to the total bill.

IBM Insurance puts the average cost of traditional handling and processing of a policy in Europe at dollars 125, compared with less than dollars 50 for telephone-based direct insurers. The potential cost advantage is greater in more restricted markets.

The technology and database needed by a telephone seller also permit the selection of the most profitable risks, and provision of a faster and better service.

With the German property and casualty personal lines market worth about DM24bn ( pounds 9.86bn), and telemarketing accounting for less than 2 per cent of premium income last year, the attractions are obvious.

There are some difficulties too. The cost advantage only applies after a telesales operation reaches a certain size. It can take three or four years to build up enough business for the operation to be profitable.

Jim Merry, of IBM's insurance group, says: 'Testing the water is not really possible. You can be successful if you already have a big client base, but greenfield operations seem to be the most successful.' He cites Direct Line (UK), Tellit (Germany and France) and Dial (Sweden) as examples of successful new creations.

The creation of a bolt-on subsidiary - the route many big UK composite insurers are exploring - is riskier because it can lead to conflict between the company's various distribution channels. It also means the risk selection and technology are likely to be less than ideal, reducing the cost advantage.

A better option may be to switch existing direct selling channels into telesales. The Netherlands' Centraal Beheer developed this way. It started in 1980 with a direct sales force, and now handles 70 per cent of transactions by telephone.

It had a national market share of 5.5 per cent - 13.1 per cent of the motor market - last year. In 1992, it also began to offer banking and credit card services, a strategy being followed by Direct Line in the UK.

Mr Merry suggests that creating a strong brand image is essential to building the client base. 'The phenomenal cost of establishing a successful telemarketer is in developing the brand image, not installing the technology.' Marketing spending needs to be the equivalent of pounds 5m to pounds 10m a year for several years, he suggests.

Derek Elias, an insurance analyst at Paribas, adds that building a big client base is not enough. 'You need to know the risk profile of those customers, and getting that in a new market is not easy.' Being able to pick lower risk customers and offer them significantly lower premium payments is an important part of the telemarketers' competitive advantage.

Even so, Mr Elias agrees that telephone sales offer the easiest and cheapest way to overcome the distribution problem, the biggest entry barrier to new markets now that regulatory barriers are falling. He says: 'Big chunks of the personal insurance market are price- sensitive. Telemarketing is going to be very successful.'

(Photograph omitted)