Table of Contents

CHAPTER 1 EXECUTIVE SUMMARY

3

Introduction

3

Market context

3

Market softening was evident as the UK general insurance market shrank in 2004

3

The general insurance market's underwriting profit increased substantially in 2004, largely due to good performances in property and pecuniary loss

3

Customer focus

4

Broker is still king in the world of commercial lines

4

Mid sized brokers are increasingly a force to be reckoned with

4

Direct selling has grown but carries limited appeal

4

Other issues are currently shaping the commercial distribution arena

4

Competitive dynamics

5

In 2004 the commercial market consolidated, as large and medium sized insurers increased their market share at the expense of the remaining smaller players

5

Eight out of the top ten commercial insurers experienced an increase in the commercial element of their general insurance books

5

Across all lines, variations in profitability metrics were in evidence

5

The future decoded

6

Conditions in the liability, property and motor markets are expected to remain tough in 2006

6

CHAPTER 2 INTRODUCTION

22

What is this report about?

22

Who is the target reader?

23

How to use this report

23

CHAPTER 3 MARKET CONTEXT

24

Introduction

24

The general insurance market shrank marginally in 2004 but profitability increased largely due to benign weather conditions

24

Market softening was evident as the UK general insurance market shrank in 2004

24

Motor and pecuniary loss led the decline

24

Growth in liability and property slowed significantly

25

Accident and health was the sector least affected by the market slowdown

25

Softening premiums across all commercial lines hampered overall growth in 2004

26

The general insurance market's underwriting profit increased substantially in 2004, largely due to good performances in property and pecuniary loss

29

While GWP growth in major accident and health lines accelerated in 2004, there was a slowdown in the performance of the overall market

32

Premium income from group A&H lines increased by 4.9 per cent in 2004

32

GWP growth in the group health sector declined from 6.4 per cent in 2003 to 4.5 per cent in 2004

34

In 2004 the accident and health market recorded an underwriting profit for the fifth consecutive year, however profitability showed a marked decline

35

Lloyd's plays a relatively minor role in UK accident and health

37

Falling rates led to static performance in key liability sectors in 2004

38

Capital inflows and a difficult pricing environment restricted GWP growth in both public and general and employers' liability

38

Lower outgoings improved the 2004 liability underwriting result, although slower NWP growth kept the market unprofitable

40

Lloyd's of London plays a significant role in liability insurance

42

The private and commercial motor markets shrank in 2004 and underwriting results worsened as soft market conditions took hold

44

Increasing competition and falling premium rates caused GWP to decline in both the commercial and the private motor markets

44

Fleet GWP fell more than commercial vehicle, but the decline in commercial vehicle is more significant as it follows a period of substantial increases

46

The motor market's underwriting losses increased in 2004 due to the poor performance of the private sector

47

The commercial motor market returned an underwriting profit in 2004, but the market has started to turn

49

Lloyd's underwriters have made a strategic shift away from high volume private motor business to focus on less competitive areas of the motor market

51

Pecuniary loss GWP fell in 2004 however the market recorded a very strong underwriting result

53

Pecuniary loss GWP fell in 2004

53

Pecuniary loss underwriting profit reached £568 million in 2004

54

Lloyd's accounted for around 9 per cent of the total pecuniary loss market in 2004

56

Good weather in 2004 allowed for very attractive margins in the property market, but growth has slowed dramatically

58

Increased competition and market correction resulted in substantially slower growth in the property market

58

Continued benign weather conditions caused the property market to achieve an excellent underwriting result in 2004

59

Strong NWP growth meant the commercial market performed extremely well in 2004, despite increases in total outgoings

61

Lloyd's underwrites over 14 per cent of UK property business

63

CHAPTER 4 CUSTOMER FOCUS

65

Introduction

65

Brokers continue to dominate the sale of commercial lines, but the dynamics within this channel are shifting

65

Independent intermediaries held onto market share in 2005

65

There has been a shift in market share among the different broker segments

67

Multinational brokers' market share has slipped slightly

67

National brokers are fighting back

68

Superprovincials are primed for steady growth

68

Regional players have seen market share eroded

68

Company staff are not a threat to brokers

68

Tied agents also exert minimal influence on distribution

69

Banks are slowly increasing their share of the distribution market

69

The direct channel has seen rapid growth

69

Retailers and affinity groups are unlikely to be more than bit-part players

70

Retailers are not a credible source of commercial insurance

70

Several important issues are currently affecting the commercial insurance distribution landscape

70

The impact of FSA regulation has preoccupied the commercial insurance industry, and has served to increase the level of consolidation in the broker market

71

Regulation has been a catalyst for consolidation, rather than a direct cause

71

The soft market is likely to restrict the speed of consolidation

72

The expense burden of FSA compliance has not been as great as anticipated, but opinions remain mixed over the benefits of regulation

73

iMarket can revolutionize the way insurance is sold

73

iMarket will bring major cost and service benefits to the industry

73

Brokers must remain mindful of their service responsibilities to get the best out of iMarket

74

The broker network space is almost saturated

75

Willis Commercial Network and The Broker Network have proved highly successful

75

There may only be room for one more large network

76

Demand for self insurance or ART will be dampened by softening market conditions

77

ART is less of a threat to brokers in the soft market

77

CHAPTER 5 COMPETITIVE DYNAMICS

78

Introduction

78

The majority of the top 10 commercial insurers grew their presence in the commercial sector in 2004 with Norwich Union remaining market leader

78

In 2004 the commercial market consolidated, as the top 10 and middle tier commercial insurers increased their market share at the expense of the remaining smaller players

78

Norwich Union is the largest commercial insurer in the UK

79

Nine of the top 10 players increased their market share in 2004

80

Norwich Union consolidated its position as the number one UK commercial insurer, growing its market share by 1.5 percentage points

80

Brit Insurance boosted its market share by 0.8 percentage points, to become the tenth largest commercial insurance provider

81

Allianz boosted its market share by 0.7 percentage points in 2004

81

AXA recorded growth of 0.6 per cent in its commercial market share

81

Zurich's share grew by 0.4 percentage points, closing the gap with Royal & SunAlliance slightly

82

New Hampshire increased its market share by 0.3 percentage points to 5.3 per cent

82

NFU Mutual grew its market share by 0.2 percentage points

82

BUPA grew its presence in the group accident and health sector in 2004

83

NIG recorded a marginal increase in market share of 0.1 percentage points

83

Royal & SunAlliance was the only top 10 player to drop market share in 2004

83

Three insurers outside the top 10 achieved rapid growth in 2004

85

Eight out of the top ten commercial insurers experienced an increase in the commercial element of their general insurance books

87

Royal & SunAlliance saw commercial business become more important to its general insurance book after ceasing to underwrite the HBoS household account

89

New Hampshire concentrated on commercial lines in 2004

89

The proportion of Brit's commercial business increased by 3.0 percentage points

89

AXA saw commercial business become more important to its overall general insurance book in 2004

89

77.3 per cent of Allianz's GEP was derived from commercial insurance in 2004

89

Commercial lines accounted for 2.0 percentage points more of NFU Mutual's premium income in comparison with 2003

90

Norwich Union also achieved larger growth in the commercial than in the personal sector

90

NIG's personal/commercial balance remained almost static

90

BUPA and Zurich FS saw personal business account for a greater proportion of their overall general insurance books

90

Operating conditions in the accident and health sector deteriorated slightly in 2004, as the combined ratio of the top 20 insurers increased

92

The loss ratio of the top 20 accident and health insurers rose by 2.4 percentage points in 2004, due to a deterioration in the health insurance market

92

PMI providers have the highest loss ratios

92

Accident and creditor insurers have lower loss ratios than health insurers

93

UKI and Royal & SunAlliance's accident and health loss ratios saw the biggest increase in 2004

93

Pinnacle saw the best improvement in accident and health loss ratio in 2004

93

The top five accident and health insurers all grew their books of business in 2004, with mixed results

94

The expense ratio of the top 20 accident and health insurers improved marginally in 2004, due to big improvements from some players

96

PMI providers have lower expense ratios than creditor insurers

97

Royal & SunAlliance, GEFI and UKI achieved the largest reductions in accident and health expense ratio in 2004

97

Hamilton, St Andrew's and Lloyds TSB saw their accident and health expense ratio increase the most in 2004

97

The combined ratio of the top 20 accident and health insurers rose slightly in 2004

99

GEFI, Royal & SunAlliance, Pinnacle and Norwich Union's accident and health books moved into profitability in 2004

100

Hamilton's accident and health book moved from a profit to a loss

100

Hard market conditions continued to improve underwriting results in the liability sector in 2004, although it remained difficult to write this business profitably

102

Hardening premiums led to lower loss ratios for the majority of the top 20 liability insurers

102

Over half of large players experienced profitable growth in 2004

103

Several players experienced double-digit loss ratio improvements in 2004

104

However, six competitors grew at the expense of worsening loss ratios

104

MMA and Royal & SunAlliance bucked the trend of rising premium income, with differing effects on profitability

105

Liability expense ratios crept up by almost 3 percentage points between 2003 and 2004, due to increased commissions

106

A mixed expense ratio performance is evident across the top five liability players

107

Decreases in absolute operating expenses were rare

107

Despite some improvements, just over half of the top 20 liability insurers are still not generating an underwriting profit

109

ACE and Zurich FS were the star performers in 2004

110

Other players have work to do

110

While the combined ratio of the 20 largest motor insurers improved in 2004, soft market conditions were in evidence

113

The loss ratio of the top 20 motor insurers fell marginally in 2004, although only 3 of the top 10 players assisted in this trend

113

Mid-sized motor insurers displayed more underwriting discipline in 2004 than those in the top 10

113

Portfolio rationalization has proved successful for several competitors

113

Conversely, some players have seen loss ratios worsen, while motor books have shrunk

114

GEP growth came at the cost of higher loss ratios for seven of the top 20 players in 2004

115

Only four players benefited from a concurrent GEP rise and loss ratio improvement in 2004

115

Expense ratios are rising slightly in the motor sector, as premium rate increases fail to keep pace with operating expenses

118

Three competitors benefited from an improved expense ratio, as they scaled back their motor books in 2004

119

However, a similar number saw expense ratios rise while their premium income fell

119

Churchill and Highway suffered, with an increase in expense ratio despite premium income growth

120

UKI and Esure see rising costs offset by robust rises in premium income

120

A slight improvement in the combined ratio of the top 20 motor insurers masks a mixed performance and irrefutable signs of market softening

123

Profitability analysis presents a mixed picture for the top 20 motor insurers overall

123

Several players are better placed to tackle softer market conditions than others

124

CIS, Esure and AXA must move towards more profitable underwriting

124

Continued combined ratio improvements for the top 20 pecuniary loss insurers cemented this sector's position as the most profitable general insurance line

127

The loss ratio of the top 20 pecuniary loss insurers fell by 3.5 percentage points in 2004, as premiums once again outstripped claims

127

AXA achieved the biggest cut in loss ratio, due to an expansion in extended warranty business

128

New Hampshire and Royal & SunAlliance achieved big cuts in loss ratio, due to large adjustments for claims in prior years

128

Zurich FS suffered due to an adjustment for claims in prior years

128

Hamilton and Motors Insurance both grew their pecuniary loss books profitably

129

The expense ratio of the top 20 pecuniary loss insurers increased by 0.6 percentage points in 2004

132

Expense ratios vary widely among pecuniary loss insurers

132

Royal & SunAlliance and Direct Line saw some of the largest reductions in pecuniary loss expense ratio

132

UKI saw the largest increase in pecuniary loss expense ratio in 2004

132

The combined ratio of the top 20 pecuniary loss insurers fell by 2.8 percentage points in 2004, due to improvements in loss ratio

134

New Hampshire's pecuniary loss combined ratio fell substantially in 2004

135

Royal & SunAlliance, AXA and Allianz moved from a loss into a profit on their pecuniary loss books

135

London General, St Andrew's and UKI moved from a profit to a loss

135

Property was one of the best performing lines for insurers in 2004, with a combined ratio of well below 100 per cent

138

The loss ratio of the top 20 property insurers fell by over 4 percentage points in 2004, as the market benefited from a benign claims experience and rising premiums

138

Liverpool Victoria and Churchill saw the largest reduction in property loss ratio in 2004

138

The top 10 insurers led the market in terms of performance

138

Four insurers saw an increase in property loss ratio in 2004

139

The expense ratio of the top 20 property insurers dropped marginally in 2004, as premium rates outstripped increases in expenses

141

St Andrew's and Hamilton saw the largest drop in property expense ratio in 2004, due to rapidly expanding books of business

142

Norwich Union and Zurich FS also performed well

142

Direct Line experienced higher acquisition costs and administrative expenses

142

Legal & General's home insurance drive pushed up its expense ratio

143

Reinsurance commissions and profit participations drop for Allianz Cornhill

143

CIS and Lloyds TSB are hit by rising administrative expenses

143

The combined ratio of the top 20 property insurers fell by almost 5 percentage points in 2004

145

Liverpool Victoria, Norwich Union and Lloyds TSB moved from a loss to a profit on their property accounts in 2004

146

Gresham, AXA and New Hampshire saw their combined ratios increase in what was a favorable market for most insurers

146

Royal & SunAlliance's combined ratio remained the same

147

Composite insurers Allianz and Zurich FS performed well

147

CHAPTER 6 THE FUTURE DECODED

150

Introduction

150

The slowdown in GWP growth that the commercial general insurance industry has witnessed is expected to end, as strong rate increases occur between 2007 and 2008

150

Slow GWP growth is expected to continue in the group accident and health market, although an uplift after 2007 is anticipated

152

The use of accident and health insurance as an absence management tool will be important in the growth of the sector in 2006

152

Group accident and health GWP is expected to reach £3.5 billion by 2010

154

The general liability market is forecast to be worth £10.3 billion in 2010

155

The soft cycle will impinge on market growth in the next few years

155

Commercial motor GWP growth is expected to pick up in 2007

158

The pecuniary loss market will grow steadily to reach a value of £7.4 billion in 2010

160

The main factors behind the growth of pecuniary loss will be legal expenses and fidelity and contract guarantee

160

Pecuniary loss GWP will reach £7.4 billion by 2010

161

After experiencing a soft cycle commercial property rates will harden and the market will be worth £5.4 billion in 2010

163

Heavy competition for commercial property risks is forcing down premium rates

163

CHAPTER 7 APPENDIX

167

Supplementary data

167

GEP and performance ratios by competitor

167

Distribution

167

Definitions

169

Definitions of general terms

169

Commercial general insurance

170

Explanatory notes to competitor tables

173

SynThesys Non-Life database

173

Explanatory notes to market total figures

181

Research sources

181

Current publications

182

Future publications

182

Relevant links

182

Datamonitor's custom research capabilities

182

SPP writing team

184

List of Tables

Table 1: Total general insurance GWP, by sector, 2000-4

26

Table 2: Commercial general insurance market premium income and year-on-year growth, split by sector 2000-4

28

Table 3: Total general insurance underwriting result, by line of business, 1994-2004

32

Table 4: Accident & health GWP split between individual and group, 2000-4

33

Table 5: Accident and health GWP by sector, 2000-4

35

Table 6: Total accident and health underwriting result, 1994-2004

36

Table 7: Accident and health GWP split between ABI members and Lloyd's / Other, 1994-2004

38

Table 8: General liability market GWP split between line of business, 2000-4

40

Table 9: Total general liability underwriting result, 1994-2004

42

Table 10: General liability GWP split between ABI members and Lloyd's / Other, 1994-2004

44

Table 11: Motor insurance GWP split between private and commercial business, 2000-4

46

Table 12: Fleet and commercial vehicle GWP, 2000-4

47

Table 13: Total motor underwriting account, 2000-4

49

Table 14: Commercial motor underwriting account, 1994-2004

51

Table 15: Motor GWP split between ABI members, Lloyd's / Other, 1994-2004

53

Table 16: Pecuniary loss market GWP by line of business, 2000-4

54

Table 17: Pecuniary loss underwriting account, 2000-4

56

Table 18: Pecuniary loss GWP split between ABI members and Lloyd's / Other, 1994-2004

58

Table 19: Property insurance GWP split between household and commercial business, 2000-4

59

Table 20: Property underwriting account, 1994-2004

61

Table 21: Commercial property underwriting result, 1994-2004

62

Table 22: Property GWP split between ABI members and Lloyd's / Other, 1994-2004

64

Table 23: Market share of distribution channels in commercial general insurance market, 2002-5

67

Table 24: Market share of commercial players grouped into top 10, 11-20 and >20, 2001-4

79

Table 25: Market share and GEP for top 10 commercial insurers 2003-4

85

Table 26: GEP of selected fastest growing commercial insurers outside top 10, 2002-4

87

Table 27: Split between commercial and personal business for the top 10 commercial insurers, 2004

92

Table 28: GEP compared to loss ratio, top 20 A&H insurers, 2003-4

96

Table 29: Expense ratio of the top 20 A&H insurers, 2003-4

99

Table 30: GEP compared to combined ratio, top 20 A&H insurers, 2003-4

102

Table 31: GEP compared to loss ratio, top 20 liability insurers, 2003-4

106

Table 32: Expense ratios of top 20 liability insurers, 2003-4

109

Table 33: GEP compared to combined ratio, top 20 liability insurers, 2003-4

112

Table 34: GEP compared to loss ratio, top 20 motor insurers, 2003-4

118

Table 35: Expense ratio of the top 20 motor insurers, 2003-4

122

Table 36: GEP compared to combined ratio, top 20 motor insurers, 2003-4

127

Table 37: GEP compared to loss ratio, top 20 pecuniary loss insurers, 2003-4

131

Table 38: Expense ratios of the top 20 pecuniary loss insurers, 2003-4

134

Table 39: GEP compared to combined ratio, top 20 pecuniary loss insurers, 2003-4

137

Table 40: GEP compared to loss ratio, top 20 property insurers, 2003-4

141

Table 41: Expense ratio of the top 20 property insurers, 2003-4

145

Table 42: GEP compared to combined ratio, top 20 property insurers, 2003-4

149

Table 43: Forecast commercial general insurance GWP, 2000-10f

152

Table 44: Group accident and health GWP, 2000-10f

155

Table 45: Forecast general liability GWP, 2000-10f

157

Table 46: Commercial motor GWP, 2000-10f

160

Table 47: Pecuniary loss GWP, 2000-10f

163

Table 48: Forecast commercial property GWP, 2000-10f

166

Table 49: Distribution channel splits in commercial lines, 2000-4

167

Table 50: Total UK general insurance market GWP by sector, 2000-4

168

Table 51: Methodology for Datamonitor's accident and health premium income splits

175

Table 52: Methodology for Datamonitor's property premium income splits

179

List of Figures

Figure 1: The UK insurance market experienced a slowdown or decline across all major lines in 2004

25

Figure 2: General liability remained the largest commercial sector in 2004

27

Figure 3: Commercial property has been a consistent strong performer in terms of GWP growth between 2000 and 2004

29

Figure 4: The underwriting profit of the UK general insurance market increased in 2004 due to strong performances from property and pecuniary loss

31

Figure 5: The individual accident & health sector recorded an increase in the rate of GWP growth in 2004, following a slow 2003

33

Figure 6: The group health market maintained steady growth in 2004, however GWP growth slowed by 1.9 percentage points

34

Figure 7: A strong underwriting result was achieved in 2004, although A&H profitability has declined in the last two years

36

Figure 8: The majority of accident and health business is underwritten by the company market

37

Figure 9: General liability GWP growth was negligible in 2004

40

Figure 10: Although still unprofitable, the general liability market saw its best underwriting result for more than a decade

41

Figure 11: Lloyd's of London plays a significant role in liability insurance

43

Figure 12: Both private and commercial motor saw GWP declines in 2004

45

Figure 13: Both fleet and commercial vehicle saw declines in GWP in 2004

47

Figure 14: The motor underwriting result deteriorated in 2004 with a loss of £71 million

48

Figure 15: Commercial motor returned an underwriting profit of £117 million

50

Figure 16: The share of the motor market written by Lloyd's, while always relatively small, has declined since 2001

52

Figure 17: Pecuniary loss GWP fell in 2004

54

Figure 18: Pecuniary loss made a large underwriting profit in 2004

55

Figure 19: The majority of pecuniary loss insurance is underwritten by ABI members

57

Figure 20: Growth in the property market was sustained in 2004

59

Figure 21: Profitability continued to improve in the property market in 2004

60

Figure 22: The commercial property market was very profitable in 2004

62

Figure 23: The vast majority of property business is written through the company market

63

Figure 24: The influence of provincial brokers is clearly weakening post-FSA

66

Figure 25: The contraction in the broker population has been precipitated by FSA regulation, but a number of other issues were already driving consolidation

72

Figure 26: The top 10 commercial insurers gained market share in 2004

79

Figure 27: Norwich Union is the leading commercial general insurer with a 12.6 per cent market share in 2004

80

Figure 28: Of the top 10 insurers, New Hampshire's commercial market share has increased the most between 2000 and 2004

84

Figure 29: Aspen, Standard Life and Highway expanded their commercial books rapidly in 2004

87

Figure 30: Many top 10 commercial insurers saw commercial business grow as a proportion of their overall general insurance books in 2004

88

Figure 31: Commercial business outweighs personal business for many of the top 10 commercial insurers

91

Figure 32: The majority of the top 20 accident and health insurers suffered a higher loss ratio in 2004

95

Figure 33: Expense ratios increased for the majority of the top 20 accident and health insurers in 2004

98

Figure 34: Only four accident and health insurers had a combined ratio above 100 per cent in 2004

101

Figure 35: Most liability insurers benefited from falling loss ratios on growing books of business in 2004

103

Figure 36: Expense ratios rose for the majority of the top 20 liability insurers in 2004

108

Figure 37: Just under half of the top 20 liability insurers achieved underwriting profitability in 2004

111

Figure 38: Only four of the top 20 motor competitors combined a growing book of business with an improved loss ratio in 2004, highlighting the onset of softening conditions in this sector

117

Figure 39: The majority of large motor insurers saw only a minor change in expense ratio in 2004

121

Figure 40: Around half of the top 20 motor insurers achieved underwriting profitability in 2004

126

Figure 41: Many of the top 20 pecuniary loss insurers grew their books in 2004, however, there was a mixed loss ratio experience

130

Figure 42: There was a very mixed expense ratio performance among the top 20 pecuniary loss insurers in 2004

133

Figure 43: The majority of pecuniary loss insurers recorded a combined ratio below 100 per cent in 2004

136

Figure 44: The majority of insurers benefited from a benign claims experience in 2004 and reduced their property loss ratios while raising premiums

140

Figure 45: Although expense ratios increased for the majority of the top 20 property insurers, the performance of eight players managed to marginally reduce the expense ratio of this group as a whole

144

Figure 46: The vast majority of the top 20 property insurers achieved underwriting profit in 2004

148

Figure 47: Across the commercial general insurance industry growth rates are expected to improve by 2008

151

Figure 48: Key variables affecting the group accident and health market, 2005e-10f

153

Figure 49: The current slowdown in group A&H GWP growth is expected to continue until 2008f

154

Figure 50: Key variables affecting general liability GWP forecasts, 2005e-10f

156

Figure 51: Cyclical volatility will continue to be a feature of the general liability market in future

157

Figure 52: Key variables affecting commercial motor GWP, 2005e-10f

158

Figure 53: Commercial motor GWP is expected to pick up in 2007

159

Figure 54: Key variables affecting pecuniary loss GWP, 2005-10f

161

Figure 55: Pecuniary loss GWP is forecast to carry on rising between 2005 and 2010

162

Figure 56: Key variables affecting commercial property GWP, 2005-10f

164

Figure 57: Commercial property GWP will dip between 2004 and 2008 followed by a period of hardening

165

Figure 58: Datamonitor's core consulting capabilities

183