RBS director sets up high-risk firm: Direct Line's founder challenges insurance industry with joint venture for 'non-standard' customers

PETER WOOD, founder of Royal Bank of Scotland's Direct Line insurance group, is to mount a new challenge to the traditional insurance industry. He is taking a 40 per cent equity stake - but 51 per cent management control - in a new joint venture specialising in higher-risk insurance, initially for drivers but later for household insurance.

The new business will cater for customers who find it difficult to get insurance at reasonable rates because of their driving records, their occupations, their types of car or where they live.

Mr Wood said: 'We aren't going to encourage 17-year-olds or persistent dangerous drivers to drive Ferraris.' But the company would, for example, offer insurance on 'more pedestrian cars' to younger drivers who found it hard to find insurance, or those in towns where rates were higher.

About 6 million of the 18 million motorists in the UK had some factor in their records that made them 'non-standard', as this type of insurance is called. Mr Wood said: 'Many are poorly served by the industry.'

He said Direct Line was expected to have nearly 2 million personal motor policies and 500,000 household policies by next September. The new company will be run entirely separately, with Mr Wood as non-executive chairman. He said he had already found a chief executive, but was keeping back the name until RBS shareholders approved the proposal in January.

He expected that it would take about six months to be up and running and within a year he hoped to move on from motor policies to household insurance.

The company, as yet unnamed, will begin with pounds 25m of capital, of which pounds 1m will be equity contributed by Mr Wood and pounds 1.5m equity from RBS. RBS is subscribing the rest as preference shares, which will pay 5 per cent.

Mr Wood is to devote a substantial part of his time to Direct Line and RBS, where he is a director, and will have no day-to-day involvement in the new company's management. It will, however, rely on the computer-based direct selling techniques pioneered by Direct Line and will pay a one-off pounds 500,000 licence fee for the technology.

RBS said there would be no overlap of customers with Direct Line, so the two would not compete. Direct Line concentrates on better-risk customers, undercutting the big insurers through low-cost service, with no brokers as middlemen.

In certain circumstances - which Royal described as only a financial meltdown - the bank would be able to take back voting control of the firm from Mr Wood.

The new launch is against the background of fierce attacks by Mr Wood on the way household insurance is sold alongside mortgages by banks and building societies, which he has described as a pounds 1bn burglary. He said the Office of Fair Trading was investigating his complaints and he had also been in touch with a number of MPs.

As evidence of the threat Direct Line poses to traditional insurers, he said household policies were now selling as fast as motor policies were two years ago.

Direct Line's pre-tax profits of pounds 50.2m came after a 92 per cent increase in premium income to pounds 409m, which makes it Britain's largest private motor insurance group, ahead of Norwich Union. It had 1.254 million motor policies at the end of September and 273,000 household policies.

The City has valued Direct Line at up to pounds 1.2bn, but George Mathewson, chief executive of RBS, said there was no intention of selling a stake in the market. He said Direct Line was a 'core part of the Royal Bank group looking forwards.'

The company has the lowest expenses as a proportion of premiums in the industry, at 10.2 per cent for motor business against an industry average of 27 per cent. Mr Wood said it was this rather than the 'cherry- picking' of which he had been accused by other companies that made Direct Line so successful.