Chain reaction

'I didn't aspire to work in the industry, I don't think anyone does, do they? I think many people end up working in insurance by accident because their original plans simply didn't come off. That would be pretty true for me as well,' says Lee Lovett, chief executive of GE Frankona Re's life and health business.

For someone who had no aspirations to sit at the top of the insurance tree, Lovett has achieved a great deal. Starting out as an administrative clerk on a humble annual salary of £2,400, over the past two decades Lovett has climbed up the insurance ranks ' underwriting, marketing, you name it ' to his current position at the top of one of the UK's largest life and health reinsurers.

Most advisers will have had little, if any, contact with a reinsurance company during their career. Being at the top of the insurance chain, reinsurers' clients are insurers, meaning they are out of sight to intermediaries. However, according to Lovett, the actions of these decision-making giants can have a direct impact on the earning power of brokers.

'You could argue that as long as brokers are getting what they want from insurers that would be their main interest,' says Lovett. 'But behind the scenes, a lot of what insurers are doing for them comes from decisions made by reinsurers. At the end of the day, the role of reinsurers, while invisible to brokers, is fairly fundamental to the continuing success of the protection market.'

And never have those words been more true than with the current debacle over guaranteed rates for critical illness cover. Now that Swiss Re has pulled out of the market, saying it is no longer prepared to harbour the risk of future guarantees, market pundits are predicting other reinsurers will soon follow suit. It is not hard to see what the knock-on effect of such a decision being made would have on advisers' critical illness sales.

'From a market perspective, if all reinsurers decided overnight they were not going to offer that cover anymore, then the impact to insurers would be that they would be unlikely to carry the risk themselves, so the guaranteed market would disappear,' says Lovett. 'This would, in turn, directly impact brokers in terms of what they could offer their clients.'

So does Lovett think other reinsurers will be following Swiss Re's lead? 'It really is a difficult question because there are a whole host of factors that influence what is going on here,' he says. 'I personally feel if the larger reinsurers pull out of guaranteed rates, the smaller reinsurers will not offer them either. Our view is that we are continuing to support our existing clients ' we are not saying we will continue with that indefinitely, but that is our current view based on what we know at this time. There is not much more I can say about the future as it is very difficult to say what things will look like in even three months' time.'

If guaranteed rates do disappear from the market, a move to reviewable rates seems to be the most realistic solution. According to Lovett, whether this will happen rests on the numbers currently being crunched in reinsurance offices.

'From my perspective, there are two ways the guaranteed market will disappear ' first, if reinsurers exit the market; second, if the price differential between reviewable and guaranteed rates becomes so large that consumers and advisers decide the cost is just too high and vote with their feet. And I don't know what that magic number is ' if the extra cost of guarantees is 10%, 15% or 20% higher, then that is probably worth paying for the certainty. But if it was 40% or 50% more, people may see that as too much,' he says.

Another direct influence reinsurers have on the market is the support they give insurers to improve claims management. Delays in the underwriting process and at the point of claim probably cause the most day-to-day hassle for advisers, when placing protection business with insurers.

However, the buck often doesn't stop there and risk assessment for particular cases is often passed to reinsurers. 'Our underwriting team are here to provide a second opinion on very large or complex risks,' explains Lovett. 'The other way we try to help insurers is through our investment with a company called Underwriting Direct which provides an outsourced underwriting service, which our clients can use as an overflow service,' he says.

Many insurers are now encouraging advisers to work electronically and most intermediaries understand the benefits that technology can offer to help speed business up. At the top end of the process, GE Frankona Re is currently digitising all its processes. Lovett says that if the whole market embraces technology more fully, advisers could see the benefits: 'The only way the process as a whole will speed up is if all our clients also work electronically so there is no paper in the chain at all. It is then that the broker will see some real differences.'

So when could end-to-end electronic processing become a reality? 'For some companies, in terms of having the equipment in place, you could say tomorrow,' he says.

Although the Government is in talks to make GP reports accessible to insurers electronically, it is doubtful that underwriting life and health will ever be straightforward. 'In this market there will always be cases that need extra evidence which will slow the process down,' says Lovett, 'clearly there is still a long way before electronic processing becomes a standard approach. However, if we look forward by just 12 months, I think we'll see some big changes and improvements.'

It is no secret that recent market conditions have given insurance companies a rough ride. With a number of life offices failing to reach the regulator's solvency requirements and the decision by Swiss Life to pull out of the UK market altogether, there are fears that the market is suffering. Despite this Lovett is confident there is little to worry about in terms of the market's long-term health.

'Most companies see this as a short-term issue that they will work through. This is maybe increasing the pace of consolidation ' but that would have happened anyway. If you go back five years, there were predictions that the number of life companies would be down to 10 in 10 years' time. Clearly a lot of life offices have been downgraded recently by ratings agencies, but the market remains fundamentally strong. Although some companies are stronger than others, most people see this as something most companies will work their way through and come out the other side.'

'A lot of companies are part of bigger groups with overseas parents and it is hard to know what the underlying strategy of those large groups are. I don't think Swiss Life's move is a reflection on the UK market ' it is a strong company that will provide a good acquisition for someone,' he says.

As for the future of the market? 'Cautiously optimistic,' he says.

Kirstie Redford is editor