Table of Contents

CHAPTER 1 EXECUTIVE SUMMARY

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The commercial property market recorded a strong underwriting profit in 2004, however the market softened in 2005

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Commercial property GWP declined in 2005 as rates softened

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The commercial property insurance market recorded a very strong underwriting result in 2004

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Commercial property claims costs rose sharply in 2005

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Claims resulting from fire, business interruption and weather damage all increased sharply

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Fire losses were a major problem for insurers in 2005

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An explosion at the Buncefield oil depot was a major event

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Retailer Primark recorded heavy fire losses when a warehouse caught fire in November 2005

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A blaze at Southampton University caused extensive damage to part of a campus in October 2005

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Commercial property insurers are concerned by the fire brigade reforms, falling building standards and take up of sprinkler systems

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As fires caused several large losses in 2005, some insurers have been keen to emphasize the effectiveness of sprinkler systems

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Commercial property insurers are concerned at some parts of the Regulatory Reform (Fire Service) Order 2005

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Insurers have also voiced concern at the fact that building standards appear to be falling, while rebuilding costs are in fact steadily rising

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Climate change is forecast to drive up flood claims in the UK, however the government can take measures to reduce these costs

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

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Company staff are not a threat to brokers

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Tied agents also exert minimal influence on distribution

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Banks are slowly increasing their share of the distribution market

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The direct channel has seen rapid growth

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

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In 2004, seven of the top ten commercial property insurers managed to increase their market share

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Norwich Union gained the most commercial property insurance market share in 2004

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Performance varied in 2004, as half of the top 10 insurers reduced their commercial property insurance gross claims ratio, and the other half saw it rise

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In 2006, premium rates will continue to fall, however in 2007, opinion is split over whether rates will begin to recover, or remain in decline

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Commercial property premium rates are falling

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CHAPTER 2 INTRODUCTION

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What is this report about?

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Who is the target reader?

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How to use this report

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CHAPTER 3 MARKET CONTEXT

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Introduction

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The commercial property market recorded a strong underwriting profit in 2004, however the market softened in 2005

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Commercial property GWP declined in 2005 as rates softened

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The commercial property insurance market recorded a very strong underwriting result in 2004

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Commissions and expenses have increased due to broker consolidation and compliance costs

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The market's claims ratio continued to drop in 2004 as premium income increased and claims incurred fell

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The expense ratio fell marginally by 0.3 percentage points in 2004

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The underwriting ratio also improved in 2004

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Commercial property claims costs rose sharply in 2005

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Claims resulting from fire, business interruption and weather damage all increased sharply

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Fire is responsible for the majority of commercial property claims costs

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Statistics from the Office of the Deputy Prime Minister demonstrate that up to 2004, commercial property fires were being brought under control

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As the number of fires in the UK soared in 2005, more businesses were forced to file interruption claims

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Commercial property weather claims costs rose sharply in 2005

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The total cost of theft claims declined in 2005

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Fire losses were a major problem for insurers in 2005

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An explosion at the Buncefield oil depot was a major event

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Retailer Primark recorded heavy fire losses when a warehouse caught fire in November 2005

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A blaze at Southampton University caused extensive damage to part of a campus in October 2005

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The presence of asbestos complicated a warehouse fire at Burton in South Derbyshire

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Commercial property insurers are concerned by the fire brigade reforms, falling building standards and take up of sprinkler systems

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As fires caused several large losses in 2005, some insurers have been keen to emphasize the effectiveness of sprinkler systems

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Commercial property insurers are concerned at some parts of the Regulatory Reform (Fire Service) Order 2005

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Insurers have also voiced concern at the fact that building standards appear to be falling, while rebuilding costs are in fact steadily rising

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Climate change is forecast to drive up flood claims in the UK, however the government can take measures to reduce these costs

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The cost of flood related claims could rise 15-fold by 2080, due to the changing climate

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High demand for property in England means local authorities are being forced to take a soft stance on floodplain building, however in Scotland, a much more disciplined approach prevails

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In Scotland there is virtually no building on floodplains

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Maintaining watercourses and improving drainage are key activities that would help prepare for the future

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However, if action is taken to reduce climate change now, emissions could be reduced significantly

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Better preparation is needed if insurers are to cope with increasing risks of weather damage

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CHAPTER 4 DISTRIBUTION

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Introduction

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

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Independent intermediaries have held on to market share in 2005

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

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Multinational brokers' market share has slipped slightly

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National brokers are fighting back

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Superprovincials are primed for steady growth

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Regional players have seen market share eroded

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Company staff are not a threat to brokers

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Tied agents also exert minimal influence on distribution

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Banks are slowly increasing their share of the distribution market

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The direct channel has seen rapid growth

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Direct insurance presents a threat to low volume business

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However, there is a limit to the effectiveness of selling direct

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

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Retailers are not a credible source of commercial insurance

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Targeting trade associations may prove worthwhile for insurers

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Insurers are developing their electronic trading platforms

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Imarket has become more sophisticated but development is still required

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Some commercial property insurers prefer to offer electronic quotation facilities through their own extranet sites

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CHAPTER 5 COMPETITIVE DYNAMICS

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Introduction

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In 2004, seven of the top ten commercial property insurers managed to increase their market share

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Norwich Union gained the most commercial property insurance market share in 2004

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Allianz recorded a 0.7 percentage point increase in market share, and overtook New Hampshire to become the fifth largest commercial property insurer in 2004

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AXA, NIG, Zurich and NFU gained commercial property insurance market share in 2004

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AXA displayed promising growth in 2004

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NIG grew its market share by 0.4 percentage points

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Zurich increased its market share by 0.3 percentage points, despite concentrating on underwriting rigor

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NFU Mutual saw its share rise marginally

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Ecclesiastical's commercial property insurance market share remained static for the third year in a row

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Royal & SunAlliance, New Hampshire and FM Insurance lost commercial property insurance market share in 2004

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The top 10 commercial property insurers gained market share from players outside the top 20

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

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The top 10 commercial property insurers experienced mixed results with their gross claims ratio in 2004, however FM Insurance recorded the lowest ratio for the fifth year running

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FM Insurance recorded the lowest commercial property insurance claims ratio in 2004

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Performance varied in 2004, as half of the top 10 insurers reduced their commercial property insurance gross claims ratio, and the other half saw it rise

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Ecclesiastical's claims ratio fell by 6.8 percentage points

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Allianz recorded strong, profitable growth

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New Hampshire's gross claims ratio suffered from a big increase in oil and petroleum claims

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Zurich also saw its claims ratios increase in 2004

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Towergate's acquisition of Fusion and intense competition in the SME sector have proven to be important competitive issues in the commercial property insurance market

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Following its acquisition by Towergate, Fusion plans to change its insurance capacity provider

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The SME sector remains highly competitive as AXA, Norwich Union and Groupama try to defend or grow their share of the commercial property insurance market

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CHAPTER 6 THE FUTURE DECODED

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Introduction

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In 2006, premium rates will continue to fall, however in 2007, opinion is split over whether rates will begin to recover, or remain in decline

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Commercial property premium rates are falling

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Pessimistic insurers forecast further rate decreases in 2007, while optimistic insurers forecast rate increases

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In Scenario 1, a positive outlook is provided in which price-based competition eases and rates increase in 2008

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GWP is expected to decline until 2008, followed by rating increases between 2008 and 2010

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Under Scenario 1 the market remains in profit between 2006 and 2010

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In Scenario 2, a more negative outlook is provided in which the market sees more aggressive competition and underwriting losses

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Scenario 2 assumes more aggressive competition in 2007 as insurers price keenly in order to win and retain business

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In Scenario 2, the market moves into an underwriting loss in 2007

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CHAPTER 7 APPENDIX

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Definitions

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Definitions of general terms

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Explanatory notes to competitor tables

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SynThesys Non-Life database

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Current publications

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Future publications

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Relevant links

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Datamonitor's custom research capabilities

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SPP writing team

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List of Tables

Table 1: Commercial property insurance GWP, 2000-5

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Table 2: Commercial property insurance underwriting account, 2000-4

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Table 3: Commercial property claims, expense and underwriting ratio, 2000-4

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Table 4: Gross incurred commercial property claims by peril, 2001-5

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Table 5: Gross incurred commercial property claims by proportion, 2001-5

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Table 6: Number of UK fires, by location, 2000-4

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Table 7: Cost of business interruption claims by cause, 2001-5

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Table 8: Commercial property weather claims, 2001-5

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Table 9: Number of commercial property theft claims, 2001-5

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Table 10: Average value of commercial property theft claims, 2001-5

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Table 11: The total cost of theft claims, 2001-5

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Table 12: Market share of distribution channels in commercial general insurance market, 2002-5

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Table 13: Market share of the top 10 commercial property insurers, 2000-4

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Table 14: Market share of the top 10 commercial property insurers compared with those ranked 11-20 and those outside the top 20, 2000-4

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

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Table 16: Gross claims ratios of the 10 largest commercial property insurers, 2000-4

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Table 17: Gross claims ratio and GEP of top 10 commercial property insurers, 2003-4

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Table 18: Scenario 1: Forecast GWP for the commercial property insurance market, 2000-2010f

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Table 19: Scenario 1: Forecast underwriting result for the commercial property insurance market, 2005e-2010f

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Table 20: Scenario 2: Forecast GWP for the commercial property insurance market, 2000-2010f

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Table 21: Scenario 2: Forecast underwriting result for the commercial property insurance market, 2005e-2010f

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Table 22: Methodology for Datamonitor's property premium income splits

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List of Figures

Figure 1: Commercial property insurance GWP fell in 2005

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Figure 2: The commercial property market was very profitable in 2004

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Figure 3: The commercial property insurance market's claims ratio has fallen steadily since 2000

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Figure 4: Fire claims rose significantly in 2005

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Figure 5: Business interruption and weather claims increased as a proportion of total commercial property claims incurred in 2005

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Figure 6: The number of commercial property fires fell significantly between 2001-4

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Figure 7: 2005 saw a hike in business interruption claims caused by fire damage

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Figure 8: Commercial property weather claims increased sharply in 2005

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Figure 9: 2005 saw a drop in both the number of commercial property theft claims

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Figure 10: The extent of the damage is revealed at Buncefield, after fires die back

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Figure 11: The influence of provincial brokers is clearly weakening post-FSA

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Figure 12: Market leader Norwich Union grew its commercial property book faster than any other top 10 competitor in 2004

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Figure 13: Norwich Union led the commercial property insurance market in 2004 with a share of 17.7 per cent

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Figure 14: Larger insurers began to seek more commercial property insurance business in 2004

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Figure 15: The vast majority of property business is written through the company market

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Figure 16: FM Insurance's claims ratio was the lowest of any top 10 commercial property insurer in 2004

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Figure 17: Allianz, Norwich Union and NFU all moved their commercial property books into more profitable territory in 2004

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Figure 18: Datamonitor estimates of premium rate movements, 2005-7

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Figure 19: Scenario 1: Key variables affecting commercial property GWP, 2005e-10f

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Figure 20: Scenario 1: GWP recovers in 2008 and climbs to £5,424 million by 2010

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Figure 21: Scenario 1: The commercial property insurance market remains in profit between 2006 and 2010

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Figure 22: Scenario 2: Key variables affecting the commercial property insurance market, 2005e-2010f

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Figure 23: Scenario 2: Commercial property insurance GWP falls to a low of £4,423 million in 2007

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Figure 24: Scenario 2: The commercial property insurance underwriting result declines until 2008

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Figure 25: Datamonitor's core consulting capabilities

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