Table of Contents

CHAPTER 1 EXECUTIVE SUMMARY

3

Introduction

3

Market context

3

Market size and profitability

3

Commercial property rates

3

Commercial property claims

3

Market issues

4

Business disaster planning

4

Risk selection

4

Global warming

4

Distribution

4

Distribution channel splits

4

Broker consolidation

5

Direct channel

5

Targeting SME Customers

5

Key survey conclusions

5

Competitive Dynamics

7

Leading competitors

7

Changing market share

7

Claims ratio

7

Lloyd's market

7

SME focus

8

The Future Decoded

8

Datamonitor forecasts

8

CHAPTER 2 INTRODUCTION

25

What is this report about?

25

Who is the target reader?

26

How to use this report

26

CHAPTER 3 MARKET CONTEXT

27

Introduction

27

Market size

27

Commercial property rates

28

Rate rises in 2002

28

Rate rises in 2003

29

Reinsurance rates

29

Rates for SMEs

30

Market profitability

30

Market profitability continued into 2002

30

Claims incurred

32

Commission and expenses

32

Historical trends

34

Commercial property claims

35

Claim costs by peril

35

Claims costs continue to rise

37

Fire remains the major peril

37

Extreme heat but no major weather disasters

39

Business interruption

39

Average theft claim surpassed £2,000

42

Property claims in 2003

44

Weather

44

Business interruption

45

Market issues

46

Business disaster planning

46

LCCI survey

46

Loss prevention

48

Lack of awareness about uninsured risks

48

Risk selection

49

Best risks

50

High hazard business

51

Global warming

51

How can insurers mitigate the threat?

51

CHAPTER 4 DISTRIBUTION

53

Introduction

53

Distribution splits

53

The broker remains the dominant distribution force in commercial insurance

53

Independent intermediaries play the biggest role

54

National brokers

55

Chain brokers and telebrokers

55

Property insurers will revise their existing broker arrangements

55

Company staff and tied agents are a waning force

55

Banks/building societies represent potential for the future

56

The direct channel has yet to make a significant impact

56

The direct channel is only appropriate for small-sized commercial property business

56

Utilities, retailers and affinity groups experience stagnant growth

57

Datamonitor distribution splits

58

Future distribution issues

60

Technological advancements

60

Polaris imarket

61

Regulation

61

CHAPTER 5 TARGETING SME CUSTOMERS

62

Introduction

62

Purchasing behavior

62

Norwich Union is the leading commercial property insurer of SMEs

62

Brokers are the primary distribution channel for property insurance

63

SMEs are unconvinced about buying property insurance from a bank or building society

64

Cheaper prices would encourage SMEs to use a bank or building society...

65

...but SMEs are concerned about their lack of specialist expertise

66

More than half of SMEs would be willing to consider direct purchase

67

Lower prices are the chief attraction of the direct channel

68

However, many SMEs are content with their broker and see no reason to move

69

Price remains the most important issue for SMEs when selecting an insurance provider

70

Additional services

71

Risk management is the most frequently received service by SMEs from their commercial property insurer

71

SMEs welcome the additional services they receive

72

SMEs have low demand for further services

73

Those who receive additional services have little need for any more...

73

...and those who do not currently receive any additional services are only partially more keen

74

The value of packaged insurance

75

Packaged insurance is valued by SMEs

75

Ease and convenience are the primary advantages of bundled packages

76

Bundled packages receive the thumbs up from SMEs...

76

...but SMEs are concerned such packages would be more costly

77

SME satisfaction and loyalty

78

The overwhelming majority of SMEs are content with their existing insurance provider

78

SMEs have medium-term loyalty to their property insurance provider

79

Price is the primary basis for customer attrition

80

Most SMEs have no plans to switch provider

81

Premium rate increases and their impact

82

Most SMEs have experienced premium rises for their property insurance policies

82

Premiums have, on average, increased by no more than 20 per cent

83

Premium increases have a negative impact on SMEs' business operations

84

Cash flow and profitability are hardest hit by premium increases

85

Insurance attitudes

87

Most SMEs have an unchanged opinion of property insurers...

87

...however, those that do think differently hold some strong views

87

Improved communication would impress SMEs

88

Survey conclusions

89

CHAPTER 6 COMPETITIVE DYNAMICS

92

Introduction

92

Top ten commercial property insurers

92

Norwich Union is the UK's leading commercial property insurer

92

Competitors gaining market share

92

Competitors losing market share

93

Comparison between the market shares of the top 10 and the top 11-20 insurers

95

Top 10 insurers have held on to market share between 2001 and 2002

96

Claims ratios of the leading commercial property insurers

97

All but two insurers achieved an improvement in gross claims ratio

97

Claims trends

97

Claims ratio trends

99

FM Insurance

100

A novel business model

100

New Hampshire

103

Royal & SunAlliance

104

Ecclesiastical

106

NIG

107

AXA

109

Zurich FS

110

Allianz Cornhill

112

NFU Mutual

114

Lloyd's market

115

The property market at Lloyd's shows rapid growth

115

Issues affecting Lloyd's competitors

117

Competitive issues

118

Increasing property capacity

119

SMEs remain a vital area of focus

120

Insurers targeting SMEs

120

Problems with SME business

121

CHAPTER 7 THE FUTURE DECODED

123

Introduction

123

Forecast GWP for the commercial property insurance market

123

Datamonitor forecasts rate softening from 2005

123

Quantitative assumptions behind the forecasts

123

Qualitative assumptions behind the forecasts

125

Forecast underwriting result

128

The next soft market will be shallower than in the past

128

Quantitative assumptions behind the forecasts

128

CHAPTER 8 APPENDIX

131

Supplementary data

131

Commercial property GEP by competitor

131

Commercial property market share by competitor

134

Property insurance performance ratios by competitor

136

Property insurance loss ratio

136

Property insurance expense ratio

139

Property insurance combined ratio

142

Property insurance commission ratio

145

Property insurance management expenses ratio

149

Property insurance net/gross premiums ratio

153

Market context

155

SME survey tables

156

Purchasing behavior

156

Additional services

160

SME satisfaction and loyalty

162

Premium rate increases and their impact

164

Insurance attitudes

165

Definitions

166

DTI definitions of SME businesses

168

Research methodology

169

Survey sample

169

Explanatory notes to competitor tables

172

GEP and market share figures

172

Accuracy of figures

175

Further reading

175

Recent titles

175

Forthcoming titles

176

Relevant links

176

Do you need more information?

176

Datamonitor Financial Services Consulting

176

SPP writing team

178

List of Tables

Table 1: Commercial property insurance GWP, 1998-2002

28

Table 2: Commercial property insurance underwriting account, 1998-2002

32

Table 3: Commercial property claims, expenses and underwriting ratio, 1998-2002

33

Table 4: Commercial property underwriting result, 1993-2002

35

Table 5: Commercial property gross incurred claims, by peril, 1998-2002

37

Table 6: Total number of property fires in the UK by type, 1997-2002p

39

Table 7: Cost of business interruption claims by cause, 1998-2002

42

Table 8: Number and average value of commercial property theft claims, 1998-2002

44

Table 9: Market share of distribution channels in commercial general insurance market, 1998-2002

54

Table 10: Datamonitor's estimates for commercial insurance distribution channel splits, 2002

60

Table 11: Market share of top ten commercial property insurance competitors, 1998-2002

95

Table 12: Market share of top ten commercial property insurers compared with those ranked 11-20, 1998-2002

96

Table 13: Claims ratios of top ten commercial property insurers, 2002

99

Table 14: Claims incurred, GEP and claims ratio for FM Insurance, 1998-2002

102

Table 15: Claims incurred, GEP and claims ratio for New Hampshire, 1998-2002

104

Table 16: Claims incurred, GEP and claims ratio for Royal & SunAlliance, 1998-2002

105

Table 17: Claims incurred, GEP and claims ratio for Ecclesiastical, 1998-2002

107

Table 18: Claims incurred, GEP and claims ratio for NIG, 1998-2002

108

Table 19: Claims incurred, GEP and claims ratio for AXA, 1998-2002

110

Table 20: Claims incurred, GEP and claims ratio for Zurich FS, 1998-2002

111

Table 21: Claims incurred, GEP and claims ratio for Allianz Cornhill, 1998-2002

113

Table 22: Claims incurred, GEP and claims ratio for NFU Mutual, 1998-2002

115

Table 23: Property GWP split between Lloyd's and ABI members, 1992-2002e

117

Table 24: Forecast GWP for the commercial property insurance market, 1998-2008f

125

Table 25: Forecast underwriting result for the commercial property insurance market, 2003e-2008f

130

Table 26: Commercial property GEP by competitor, 1998-2002

131

Table 27: Commercial property GEP by competitor, 1998-2002, cont.

132

Table 28: Commercial property GEP by competitor, 1998-2002, cont.

133

Table 29: Commercial property market share by competitor, 1998-2002

134

Table 30: Commercial property market share by competitor, 1998-2002, cont.

135

Table 31: Property loss ratio, by competitor, 1998-2002

136

Table 32: Property loss ratio, by competitor, 1998-2002, cont.

137

Table 33: Property loss ratio, by competitor, 1998-2002, cont.

138

Table 34: Property expense ratio, by competitor, 1998-2002

139

Table 35: Property expense ratio, by competitor, 1998-2002, cont.

140

Table 36: Property expense ratio, by competitor, 1998-2002, cont.

141

Table 37: Property combined ratio, by competitor, 1998-2002

142

Table 38: Property combined ratio, by competitor, 1998-2002, cont.

143

Table 39: Property combined ratio, by competitor, 1998-2002, cont.

144

Table 40: Property commission ratio, by competitor, 1998-2002

145

Table 41: Property commission ratio, by competitor, 1998-2002, cont.

146

Table 42: Property commission ratio, by competitor, 1998-2002, cont.

147

Table 43: Property commission ratio, by competitor, 1998-2002, cont.

148

Table 44: Property management expenses ratio, by competitor, 1998-2002

149

Table 45: Property management expenses ratio, by competitor, 1998-2002, cont.

150

Table 46: Property management expenses ratio, by competitor, 1998-2002, cont.

151

Table 47: Property management expenses ratio, by competitor, 1998-2002, cont.

152

Table 48: Property net / gross premiums ratio, by competitor, 1998-2002

153

Table 49: Property net / gross premiums ratio, by competitor, 1998-2002, cont.

154

Table 50: Property net / gross premiums ratio by competitor, 1998-2002, cont.

155

Table 51: Preparedness of London SMEs for business disaster, 2003

156

Table 52: What is the name of your commercial property insurer?

156

Table 53: Where do you purchase your commercial property insurance from?

157

Table 54: Would you consider buying your commercial property insurance from a bank/building society?

157

Table 55: If yes, why?

157

Table 56: If no, why not?

158

Table 57: Would you consider buying your commercial property insurance direct?

158

Table 58: If yes, why?

158

Table 59: If no, why not?

159

Table 60: What were the most important reasons for choosing your commercial property provider?

159

Table 61: What services do you receive from your commercial property provider?

160

Table 62: Overall, how useful are these services?

160

Table 63: If you already receive services from your commercial property provider, what other services would you like to receive?

160

Table 64: If you do not receive services from your commercial property provider, what other services would you like to receive?

161

Table 65: How attractive is commercial insurance bundled and sold in a package?

161

Table 66: Why is a bundled package attractive?

161

Table 67: Why is a bundled package unattractive?

162

Table 68: How satisfied are you with your commercial property insurance provider?

162

Table 69: How long have you been with your current commercial property provider?

162

Table 70: Why have you changed your commercial property provider in the last two years?

163

Table 71: Do you think you will change your commercial property provider in the next 12 months?

163

Table 72: If yes, why?

163

Table 73: Did your commercial property insurance premium increase at last renewal?

164

Table 74: If yes, by approximately what percentage?

164

Table 75: Have increases in your commercial property premium affected your business?

164

Table 76: If yes, how?

165

Table 77: Has your attitude towards commercial property insurers changed over the last 12 months?

165

Table 78: What can commercial property insurers do to change their image?

165

Table 79: What business sector are you involved in?

170

Table 80: How would you best describe your principal property requirements?

171

Table 81: Methodology for Datamonitor's property premium income splits

174

List of Figures

Figure 1: The commercial property market has seen two years of striking premium income growth

28

Figure 2: The commercial property market remained profitable in 2002

31

Figure 3: Commercial property performance ratios have remained stable in the past few years

33

Figure 4: Historical performance suggests the commercial property market will soon reach its peak of profitability

34

Figure 5: Fire claims are the most costly in commercial property insurance

36

Figure 6: The incidence of fires decreased in 2002

38

Figure 7: Fire damage has been the most costly cause of business interruption for the last 11 years

41

Figure 8: Average theft claim value continued to increase steadily in 2002

43

Figure 9: London SMEs are highly unprepared for disaster situations

47

Figure 10: Different trades represent varying levels of risk to commercial property insurers

50

Figure 11: The UK's average annual temperature has increased, 1659-2001

52

Figure 12: Brokers continue to be the principal distribution channel for commercial general insurance

53

Figure 13: Datamonitor estimates that over 90 per cent of commercial insurance business is conducted through brokers

59

Figure 14: Norwich Union was named as the leading commercial property insurer for SMEs

63

Figure 15: Brokers dominate the distribution of commercial property insurance among SMEs

64

Figure 16: Opinion is divided among SMEs about buying insurance from a bank or building society

65

Figure 17: A competitive package would tempt SMEs to a bank or building society

66

Figure 18: Lack of specialism deters SMEs from banks and building societies

67

Figure 19: SMEs are not averse to the idea of buying insurance direct

68

Figure 20: SMEs believe cost savings can be achieved by purchasing property insurance direct

69

Figure 21: Satisfaction with their existing broker is preventing many SMEs from going direct

70

Figure 22: Price is SMEs' most important consideration when buying property insurance

71

Figure 23: More than half of SMEs receive no additional services from their commercial property provider

72

Figure 24: Over two-thirds of SMEs find the additional services they are receiving useful

73

Figure 25: Most SMEs feel the services they currently receive are sufficient

74

Figure 26: SMEs not currently receiving additional services are happy to preserve the status quo

75

Figure 27: SMEs are in favor of bundled packages of commercial insurance

76

Figure 28: Bundled insurance is an easier and cheaper option for SMEs

77

Figure 29: Cost concerns deter SMEs from bundled packages

78

Figure 30: Few SMEs are dissatisfied with their property insurance provider

79

Figure 31: Most insurers have been with their property insurer for 2-5 years

80

Figure 32: Price is most likely to tempt SMEs to competing insurance providers

81

Figure 33: SMEs considering a change of provider base this decision on the grounds of price

82

Figure 34: 71 per cent of SMEs experienced a rise in their commercial property insurance premium at last renewal

83

Figure 35: Premium increases of between 0 and 20 per cent have been most typical

84

Figure 36: A fifth of SMEs have seen their business affected by more expensive property insurance premiums

85

Figure 37: Rising premiums place greater financial constraints on SMEs

86

Figure 38: The bulk of SMEs have not changed their impression of their property insurer

87

Figure 39: Cheaper prices and better communication would improve insurers' standing in the eyes of SMEs

89

Figure 40: Four insurers account for over half the entire commercial property market

94

Figure 41: The top 10 commercial property insurers maintained a stable market share between 2001 and 2002

96

Figure 42: All of the top 10 commercial property insurers had claims ratios below 100 per cent in 2002

98

Figure 43: Most of the leading commercial property insurers became more profitable in 2002

100

Figure 44: FM Insurance has the lowest claims ratio of any of the top ten commercial property insurers

102

Figure 45: New Hampshire's claims ratio experienced a remarkable improvement in 2002

103

Figure 46: Royal & SunAlliance's claims ratio continues to improve

105

Figure 47: Ecclesiastical steadied the ship in 2002

106

Figure 48: NIG has managed to keep its claims ratio down despite a significant increase in GEP

108

Figure 49: AXA improved its claims ratio in spite of rising GEP

109

Figure 50: Zurich's commercial property premium income jumped but claims ratio continued its downward course

111

Figure 51: Allianz Cornhill decreased its claims ratio but it still exceeds 2000 levels

113

Figure 52: NFU Mutual's claims ratio increased for the third successive year

114

Figure 53: Lloyd's property market shows highest growth in 10 years

116

Figure 54: The slowdown in GWP growth will be shallower than in previous soft markets

124

Figure 55: Commercial property insurance forecast assumptions

126

Figure 56: Commercial property insurance forecast assumptions, cont.

127

Figure 57: The commercial property market will sink back into loss in 2006

129

Figure 58: Almost a quarter of the SMEs surveyed are involved in the retail sector

170

Figure 59: Office and retail sites are SMEs' principal property requirements

171