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Pure General Insurance Case Study (PGI)

The business was founded in 1922 when two friends Andy Purfect and Bill Reeves as Pure General Insurance. During the 1930s and 1940s the business specialised in the new member groups which were beginning to set up such as the Government Services Motoring. Bill’s wife was a local government employee and was a member of the club before they married. She started the partnership down this road when she and a few of her fellow members asked Bill to arrange motor insurance for them and provide the club with an income by sharing the commission (thereby exploiting the groups buying power to gain a discount).

As a broker, PGI get a 25% commission for each policy they place with an insurance writer (insurance company in the main). Once the seed had been sown, Bill concentrated his efforts in signing up other “affinity” groups (membership groups such as staff associations and clubs) and eventually moved into the larger trade union groups offering the full range of motor insurance policies to group member whilst sharing commissions with the group. The groups were happy to make these arrangements, as they were able to enjoy another income stream in addition to their membership fees. Affinity groups received 10% of the insurance premium leaving PGI with 15%.

The 1980s were a turbulent time for insurers, especially motor insurance providers with the rise in direct insurers such as Direct Line (DL). DL took the market by storm by introducing the direct insurance concept whereby the consumer was able to go direct to the insurer and cut out the middleman (broker –PGI in this case) and get a cheaper deal. In addition DL were able to “cherry pick” the lower risk customers (those who didn’t have many accidents) because they could ask more question and better understand the risk they were taking on when compared to the traditional distribution channel of brokers. Brokers by this time were operating delegated underwriting arrangements. This is where the Insurance Company allows the introducer to commit the insurance company to the risk so long as the risk fells within certain parameters. This delegated underwriting enabled the brokers to operate a panel of insurance companies (that is a number of insurance companies who granted these rights to PGI) and offer their customers a competitive price for their particular risk, however the process was not as refined as the one that DL introduced.

DL in addition to cherry picking the lower risks, were able to put pressure on their competitors by removing the profitable element from their insurance books.Insurers set premiums by balancing the operating costs (costs of settling claims) with their desired profit margin.This left them with lower quality customers who made more insurance claims which increased the operating costs for the insurance company. This eventually filtered down to the customer as increased premiums. This was in stark contrast the direct insurers who were lowering premiums as they had lower operating costs, due to less claims, and a centralised operating office without the need for branch offices. These forces sparked the advent of a move to direct insurers by all insurance companies and the consumer concept of “shopping around” for the cheapest deal became commonplace. Initially delivery was facilitated by the telephone and in the 2000s moved to the Internet where it was much easier and convenient for c