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UK's Direct Line in VW deal as insurers fret carmakers could leave them stranded

Direct Line Insurance Group Plc has signed a letter of intent to become the U.K. insurance partner for Volkswagen AG.

The deal will include Volkswagen brands Audi, SEAT, Skoda, Volkswagen and Volkswagen Commercial, and will run for at least five years, CEO Paul Geddes told analysts at a conference for the insurer's 2017 results.

Insurers have been worried in recent years that car manufacturers could cut them out of the loop, as they have strong brands and also — thanks to the growing sophistication of the technology in vehicles — increasing access to customers' driving data, which they could theoretically use as a basis to offer their own insurance products.

Geddes said that partnerships were a "strategic" part of Direct Line's motor business.

"Our objective is to be the partner of choice for car manufacturers," he said. "The current transformation of the motor industry provides both risks and opportunities to insurers. We want to partner with motor manufacturers to be in that value chain, working with them to create exciting new propositions for customers."

Direct Line is already the insurance partner for French car manufacturer Groupe PSA, which owns the Citroën and Peugeot brands. This deal has been extended to run until 2021. It also has an agreement with Tesla, under which the smart car manufacturer introduces its customers to Direct Line.

Home insurance push

The company is also seeking more partnerships for its home insurance business and is overhauling its technology systems to enable this, including decommissioning its "expensive" old mainframe.

The insurer's home partnerships have suffered setbacks recently. The company stopped writing home business for U.K. supermarket Sainsbury's in February 2017 after losing the contract, and its home insurance deal with Nationwide Building Society came to an end in December 2017.

But the company has a continuing deal with former parent bank Royal Bank of Scotland Group Plc and its subsidiary NatWest. Geddes said its objective is to grow that partnership and selectively to acquire new ones. He said the company had "significantly increased new business sales and therefore stabilized the book" in home partnerships and had been doing work behind the scenes to ensure Direct Line's systems integrate more closely with those of its partners.

"We want to use this platform to add new partners," he said.

Price comparison upgrade

Geddes announced the partnership push alongside developments in Direct Line's two other main distribution channels: direct and price comparison websites. For the business it gets from price comparison websites, Direct Line group is beefing up its pricing engine and its ability to detect application fraud — customers trying to mislead insurers about the risks being insured to try to get a more favorable price.

"We are competent on pricing and fraud, which matter a lot in this area, and that has enabled us to be competitive and to have a steady share at adequate margins," he said. "But our ambitions are much greater. We are investing to have class-leading capabilities, and when we have these, we will want to grow this channel."

To enable the changes it is making, Geddes said the company is overhauling its core technology.

"We have a preference to rent rather than buy infrastructure, and we are increasing our cloud usage. We have a plan to reduce and ultimately decommission our expensive mainframe," he said.

The company is planning to launch a new data architecture in 2019 following testing this year, roll out its new system for small-to-medium-sized enterprises to 75% of target businesses this year and also launch a new system for its travel insurance business.

Direct Line reported full-year 2017 consolidated profit attributable to owners of the company of £434.0 million, up 55.7% from £278.8 million earned a year ago. The increase was driven in part by the lack of a charge for the increase in the U.K. personal injury discount rate, which hit its 2016 profit.