Table of Contents

CHAPTER 1 EXECUTIVE SUMMARY

3

Profits slipped in the UK general insurance market in 2005, as soft market conditions took their toll on most lines of business

3

Soft market conditions were evident in many lines of business in 2005

3

The motor market led the decline with a reduction of 1.5 per cent

3

Property and accident and health also went into decline

3

Liability and pecuniary loss continued to improve

3

Commercial insurance is largely distributed through intermediaries, however, there are signs of growth in other channels

4

Brokers still dominate the distribution of commercial lines insurance

4

Direct insurers hold a relatively small share of the commercial market

4

Banks and building societies remain small players in the commercial insurance market

4

The top 10 commercial insurers control almost 70 per cent of the market

5

The three largest commercial insurers RSA, Norwich Union and Zurich all have substantial property, commercial motor and liability accounts

5

Royal & SunAlliance has large motor, property and liability accounts, and saw growth in Risk Solutions and marine in 2005, amongst other areas

5

Norwich Union also has large property, motor and liability accounts and focuses on small and mid-sized businesses

6

Zurich's largest line was liability, which was hit by strong competition

6

The total commercial market will grow at a steady pace driven largely by the commercial liability sector, while group accident and health and commercial pecuniary loss are set to see steadier growth

6

The commercial liability market and the commercial pecuniary loss market are forecast to see the fastest growth between 2006 and 2011

6

Group accident and health and commercial motor are forecast to see steady growth

7

CHAPTER 2 INTRODUCTION

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What is this report about?

24

Who is the target reader?

24

How to use this report

25

CHAPTER 3 MARKET CONTEXT

26

Introduction

26

Profits slipped in the UK general insurance market in 2005, as soft market conditions took their toll on most lines of business

26

Soft market conditions were evident in many lines of business in 2005

26

The motor market led the decline with a reduction of 1.5 per cent

26

Property and accident and health also went into decline

26

Liability and pecuniary loss continued to improve

27

The commercial market suffered more than the personal market in 2005

28

Commercial property and commercial motor led the commercial GWP contraction

28

The general insurance market's underwriting profit began to decline in 2005, as competition took its toll on most sectors

31

The accident and health market declined in 2005, driven by a large fall in accident sector premium income, in spite of robust growth in the group health sector

34

Group accident and health GWP increased, while the individual sector stagnated

34

The group health market drove the growth in the group accident and health sector

36

The accident and health market recorded an underwriting profit for the sixth consecutive year in 2005, but profitability declined

38

The proportion of the accident and health market written outside the company market has increased as Lloyd's and others have increased GWP, while company players have decreased

39

The liability market achieved marginal growth, and came very close to achieving underwriting profitability in 2005

41

Competition took its toll on the liability market, though increased penetration rates in some lines secured marginal growth overall

41

The liability market almost moved into a profit in 2005 due to strong NWP growth

43

Lloyd's and non-company players decrease in market share, but maintain a significant role in the liability market

45

The commercial and private motor markets contracted in 2005 as soft market conditions persisted

47

Sustained high levels of competition and sliding premium rates led to declines in GWP for both private and commercial motor

47

The fleet market held up in 2005, while commercial vehicle recorded the worst decline of any motor line

49

The motor market's underwriting losses increased in 2005 due to the poor performance of the private sector

50

The commercial motor market returned a much reduced underwriting profit in 2005

52

Lloyd's insurers have continued to reduce exposure to the motor market in 2005, a move pursued since 2001

53

The pecuniary loss market grew rapidly in 2005 and although profitability fell, it still returned a healthy underwriting result

55

The pecuniary loss market was worth £5.5 billion in 2005

55

Although the underwriting result dropped in 2005, pecuniary loss remains a profitable line

56

The market share and premium income of non-ABI companies and Lloyd's syndicates grew in 2005

58

Following a significant slowdown in 2004, the property market went into decline in 2005 due to the performance of commercial property

60

The market's overall decline resulted from a 7.5 per cent fall in commercial property GWP

60

Property underwriting profits fell slightly in 2005, as the effect of increased competition began to have an impact

62

Profitability declined as growth in total outgoings outstripped growth in NWP

62

The commercial property underwriting result fell by 38.6 per cent in 2005

64

Lloyd's and other non-ABI companies accounted for an increasing share of the property insurance market in 2005

65

CHAPTER 4 CUSTOMER FOCUS

68

Commercial insurance is largely distributed through intermediaries, however, there are signs of growth in other channels

68

Brokers still dominate the distribution of commercial lines insurance

68

Independent intermediaries are still the major distribution channel within commercial lines insurance

68

Direct insurers hold a relatively small share of the commercial market, however, growth is expected to pick up in terms of policy numbers

68

Direct insurers hold a small share of the commercial insurance market

68

Insurers are expecting to see growth in the direct channel

69

The growth of the direct channel will be limited by low average premium spends and buying behaviour

69

Banks and building societies remain small players in the commercial insurance market

70

There is potential for retailers and affinity groups to grow their market share, however, this is limited by the need for advice

71

imarket makes interactions between insurers and brokers more efficient and further progress is expected in the coming years

73

imarket is an internet portal for brokers that allows multiple quotes to be generated from one application form

73

imarket added two new carriers in 2005 and 2006

74

Further integration with software houses would benefit imarket

74

CHAPTER 5 COMPETITIVE DYNAMICS

76

Introduction

76

Merger and acquisition interest among insurers was muted in 2006, but three new start-up underwriting agencies entered the market

76

M&A activity was muted among insurers, though failed bids and speculation show insurers' continued interest

76

A few deals were made in 2006 involving Lloyd's insurers

77

Acquisition activity has been more common among brokers

78

Three new start-up underwriting agencies entered the commercial insurance market in 2006, targeting the SME sector

79

Start-up ABC Insurance was bought by Liverpool Victoria

79

M4 Underwriting started writing business in June 2006 backed by Allianz

80

Start-up Arista Insurance will also target the SME market

80

A continued focus on cost reductions led to job cuts and offshoring in 2006

80

2006 saw a number of high profile UK job cuts as insurers continued to move jobs abroad

80

Brokers are also showing interest in offshoring

81

The top 10 commercial insurers control almost 70 per cent of the market

82

The three largest commercial insurers RSA, Norwich Union and Zurich all have substantial property, commercial motor and liability accounts

82

Royal & SunAlliance has large motor, property and liability accounts, and saw growth in Risk Solutions and marine in 2005, amongst other areas

82

Norwich Union also has large property, motor and liability accounts and focuses on small and mid-sized businesses

83

Zurich's largest line was liability, which was hit by strong competition

83

AXA and Allianz emphasize the strong competition in commercial lines, but saw growth in selected areas

84

AXA experienced decreases in liability, but saw growth in group health

84

Allianz also found liability challenging

84

New Hampshire, BUPA and NFU Mutual are specialist commercial lines insurers

85

New Hampshire focuses on liability insurance

85

BUPA is exclusively a health insurer

85

NFU writes only liability and motor insurance in commercial lines

85

ACE and QBE were number eight and ten in the ranking of UK commercial insurers in 2005

85

ACE was ranked 8th among commercial insurers in 2005 and focuses almost exclusively on liability insurance in the UK

85

QBE is the 10th largest UK commercial insurer and focuses on commercial motor and liability insurance

86

Among commercial insurers ranked 11-20 some insurers are growing quickly, suggesting that they may one day threaten the position of the top 10

87

For most of the top 10 commercial insurers commercial business is the most important line

91

The commercial book dominates for all but one of the top 10 insurers that focus on both commercial and personal lines

91

Two of the top 10 commercial lines have no personal book to speak of

92

Norwich Union is the only insurer among the top 10 for which personal lines dominates

92

Profitability declined in the accident and health market, driven by increases in loss ratios in particular

94

Changes in FSA reporting categories have affected accident and health ratio comparisons

94

Many accident and health insurers saw loss ratios increase in 2005, but a clear divide is emerging between PMI and accident insurance specialists

95

Norwich Union, BCWA and Legal & General all recorded double digit loss ratio growth

95

Stonebridge, SimplyHealth and Fortis achieved impressive loss ratio reductions

96

Expense ratios rose by 3.0 per cent in 2005, with accident specialists driving this increase

98

While PMI providers succeeded in reducing their expense ratios, accident and travel insurance specialists more often suffered an increase

99

PMI providers BUPA and WPA had the best expense ratios in 2005

99

Norwich Union, Legal & General and New Hampshire achieved the best expense ratio reductions

99

BCWA and Stonebridge recorded large expense ratio increases

100

The combined ratio of the top A&H providers rose by 5.3 per cent in 2005, with the majority of PMI and accident providers contributing to this performance

102

The companies with the best ratio metrics were from the accident and travel sectors, not the PMI market

102

New Hampshire, Fortis and SimplyHealth all made impressive combined ratio improvements in 2005

102

BCWA had a terrible year in 2005, however GEFI, Clinicare and Groupama all suffered big combined ratio increases as well

103

Liability insurers recorded improvements in profitability in 2005, as many insurers combined premium income growth with a reduction in combined ratio

105

Changes in FSA reporting categories have affected liability ratio comparisons

105

Over half of the top 20 liability insurers increased their premium income in 2005, with the majority also experiencing reductions in loss ratio

105

Many companies combined increases in premium income with improvements in loss ratio

105

Only three liability insurers saw an increase in loss ratio in 2005

106

The largest liability insurers generally have loss ratios of around 60 per cent, while smaller insurers have more varied loss ratios

107

The majority of liability insurers saw increases in their expense ratios in 2005

108

XL and Catlin saw the highest increases in expense ratios in 2005, while many other insurers saw smaller increases

109

However, a few insurers bucked this trend and managed to reduce their expense ratio

109

Over half of the top 20 liability insurers improved their profitability in 2005, athough reporting has had an impact on these figures

111

Of the top 20 liability insurers 13 returned combined ratios below 100 per cent in 2005

112

Some companies, however, still suffer from unprofitable liability books

112

Soft market conditions led to both falling premiums and reductions in profitability for many of the top 20 motor insurers

115

The loss ratio of the top 20 motor insurers increased in 2005 and soft market conditions were evident as many companies suffered declining premium income

115

Many insurers saw worsening loss ratios and reductions in income, suggesting that some have accepted reduced premiums

115

Three companies saw a decline in premium income but improved loss ratio

117

Six companies managed to improve their loss ratios while growing their motor books

117

First Alternative was the only top 20 company that combined an increase in premium income with a growing loss ratio

118

The expense ratio of the top 20 motor insurers saw a small deterioration in 2005

120

Only a few insurers saw substantial changes to their expense ratios in 2005

121

Soft market conditions led many insurers with a combined ratio already over 100 per cent to suffer further reductions in profitability

123

11 of the top 20 motor insurers failed to return an underwriting profit in 2005

123

Many companies combined increasing unprofitability with falling premium income, suggesting that some players have cut their premiums to maintain market share

124

11 of the top 20 returned an underwriting loss and seven of these further increased their combined ratios in 2005

124

Nine companies recorded underwriting profits in 2005, with five of these seeing improvements on their 2004 results

126

Several players have dealt well with the soft cycle so far and are set to continue riding the cycle in the future

126

Pecuniary loss is a profitable line with an average combined ratio below 100 per cent however, high expense ratios are a problem for a sub-group of insurer

130

Changes in FSA reporting categories have affected pecuniary loss ratio comparisons

130

In general the loss ratio for pecuniary loss is lower than other lines

130

The influence of the expense ratio or the loss ratio on pecuniary loss insurers' profitability varies depending on their main line of business

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Insurers that mainly write personal creditor business have low loss ratios and high expense ratios

131

Insurers that specialize in commercial pecuniary loss generally have low expense ratios

132

The remainder of the top 20, with expense ratios around 40-60 per cent, underwrite a variety of pecuniary loss lines

132

Just over half of the top 20 pecuniary loss insurers recorded underwriting profits in 2005, making it a profitable business overall

134

Pecuniary loss is a profitable business for many insurers

134

However, a group of companies struggled to secure a profit

135

Property insurance operating conditions improved slightly in 2005, although many players saw their combined ratios increase

136

The loss ratio of the top 20 property insurers improved in 2005

136

Nine of the top 20 actually recorded an increase in loss ratio, with significant increases from several players

137

Ecclesiastical, Direct Line and Allianz all recorded large loss ratio increases

137

St. Andrew's and Norwich Union all achieved big reductions in loss ratio, going against the market trend of rising claims costs

138

Liverpool Victoria's loss ratio was the worst of the property sector's top 20 players

138

The expense ratio of the top 20 property insurers increased by 1.8 percentage points in 2005

140

Direct writers and mutual insurance companies had the best expense ratios

141

CIS, Royal & SunAlliance and Zurich all saw significant increases in expense ratios

141

Lloyds TSB and NIG achieved large reductions in their expense ratios

142

The combined ratio of the top 20 property insurers fell marginally by 0.4 per cent in 2005, driven by the performance of just under half of this peer group

144

11 of the top 20 property insurers recorded an increase in combined ratio

145

Reflecting softer market conditions, Legal & General moved into an underwriting loss

145

Direct Line, Allianz and Ecclesiastical saw the biggest increase in combined ratio

145

Lloyds TSB, St. Andrew's and Norwich Union all achieved double digit figure combined ratio reductions

146

CHAPTER 6 FUTURE DECODED

148

Introduction

148

The total commercial market will grow at a steady pace driven largely by the commercial liability sector, while group accident and health and commercial pecuniary loss are set to see steadier growth

148

The commercial liability market and the commercial pecuniary loss market are forecast to see the fastest growth between 2006 and 2011

148

Group accident and health and commercial motor are forecast to see steady growth

149

The accident and health market will record slow growth, as the group sector continues to outperform the individual sector

150

The group sector will manage to sustain marginal policyholder number growth, while increases in premium inflation are recorded

150

The group accident and health market is forecast to grow by a compound annual rate of 4.8 per cent between 2006 and 2011

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Liability is expected to remain competitive until the end of 2007, after which GWP growth is forecast to pick up

154

Competition continued to dominate the liability market in 2006, putting pressure on premium rates

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The turn of the cycle is expected in late 2007

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Commercial motor GWP is expected to recover in the second half of 2007, with stronger growth to come

157

Rate increases are expected to lead to an improvement in operating conditions in the commercial motor market

157

The commercial motor market is forecast to reach a value of £4.1 billion by 2011

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The commercial pecuniary loss market is forecast to grow to a value of £1.7 billion by 2011

160

The forecast for pecuniary loss is based on historical trends

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The commercial pecuniary loss market is forecast to grow by 10.0 per cent on a compound annual basis between 2006 and 2011

160

The commercial property market is seeing price competition, however it is expected to turn in 2008 and reach a value of £5.5 billion by 2011

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The commercial property market is seeing intense competition

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Datamonitor forecasts that the commercial property insurance market will reach £5.5 billion by 2011

163

CHAPTER 7 APPENDIX

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Methodology

166

FSA Return changes

166

Major changes in FSA Return categories and their impact

166

Market size

167

Changes in market size information

167

Market size methodology

167

Lloyd's players and underwriting result figures

168

2005 definitions for lines of business

168

Accident & health

168

Medical expenses

168

HealthCare cash plan

168

Travel

169

Personal accident or sickness

169

Motor

169

Total private motor

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Total commercial motor

169

Private motor comprehensive

169

Private motor non-comprehensive

170

Motorcycle

170

Fleets

171

Commercial vehicles (non-fleet)

171

Property

171

Total commercial property

172

Household and domestic all risks.

172

Consequential loss (i.e. business interruption)

172

Financial/Pecuniary loss business

172

Total personal financial loss business

173

Total commercial financial loss business

173

Legal expenses

173

Fidelity and contract guarantee

173

Liability business

173

Employers liability (including the employers liability part of mixed liability packages but excluding mixed commercial packages)

174

Professional indemnity (including directors' and officers' liability and errors and omissions liability)

174

Public and products liability

174

Mixed commercial package

174

Total personal

175

Total commercial

175

Pre-2005 definitions for lines of business

175

Accident and health

176

Individual accident and health

176

Group accident and health

176

General liability

177

Motor

177

Pecuniary loss

178

Total pecuniary loss figures

178

Property

178

Definitions of ABI terms

180

Brokers

180

National brokers

180

Other intermediaries & brokers

180

Chain brokers & telebrokers

180

Direct

181

Other company agents

181

Utilities/retailers/affinity groups

181

Company staff

181

Banks/building societies

181

Written premiums

181

Current readings

181

Future readings

182

Do you need more information?

182

Datamonitor Financial Services Consulting

182

SPP writing team

184

List of Tables

Table 1: Total general insurance GWP by line of business 2001-5

28

Table 2: Commercial general insurance market GWP and year-on-year growth, split by sector 2001-5

31

Table 3: Total general insurance underwriting result, by line of business, 1995-2005

33

Table 4: Accident & health GWP split between individual and group, 2001-5

35

Table 5: Accident and health GWP by sector, 2001-5

37

Table 6: Total accident and health underwriting result, 1995-2005

39

Table 7: Accident and Health market GWP split by UK company market players and Lloyd's/Non-company market, 1995-2005

41

Table 8: General liability market GWP split by line of business, 2001-5

43

Table 9: Total general liability underwriting result, 1995-2005

45

Table 10: General liability GWP split between ABI members and Lloyd's / Other, 1995-2005

47

Table 11: Motor insurance GWP split between private and commercial business, 2001-5

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Table 12: Commercial motor insurance GWP split by line, 2001-5

50

Table 13: Total motor underwriting account, 2001-5

51

Table 14: Commercial motor underwriting account, 1995-2005

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Table 15: Motor GWP split between ABI members, Lloyd's / Other, 1995-2005

55

Table 16: Pecuniary loss market GWP by line of business, 2001-5

56

Table 17: Pecuniary loss underwriting account, 2001-5

58

Table 18: Pecuniary loss GWP split between ABI members and Lloyd's / Other, 1995-2005

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Table 19: Property insurance GWP split between household and commercial business, 2001-5

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Table 20: Property underwriting account, 1995-2005

63

Table 21: Commercial property underwriting result, 1995-2005

65

Table 22: Property GWP split between ABI members and Lloyd's / Other, 1995-2005

67

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

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Table 24: Top 10 commercial competitors by GWP and market share, 2005

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Table 25: GWP of selected fast growing commercial insurance players ranked 11-20

91

Table 26: Split between commercial and personal business for the top 10 commercial insurers, 2005

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Table 27: Premium income compared to loss ratio, top 20 A&H insurers, 2004-5

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Table 28: Expense ratio of the top 20 A&H insurers, 2004-5

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Table 29: Premium income compared to combined ratio, top 20 A&H insurers, 2004-5

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Table 30: Loss ratio compared to premium income for the top 20 liability insurers, 2004-5

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Table 31: Expense ratio compared to premium income for the top 20 liability insurers, 2004-5

111

Table 32: Combined ratio compared to premium income for the top 20 liability insurers, 2004-5

114

Table 33: Loss ratio compared to premium income for the top 20 motor insurers, 2004-5

120

Table 34: Expense ratio compared to premium income for the top 20 motor insurers, 2004-5

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Table 35: Premium income compared to combined ratio for the top 20 motor insurers, 2004-5

129

Table 36: Loss and expense ratios compared to GWP for the top 20 pecuniary loss insurers, 2005

134

Table 37: Combined ratio compared to GWP for the top 20 pecuniary loss insurers, 2005

136

Table 38: Premium income compared to loss ratio, top 20 property insurers, 2004-5

140

Table 39: Expense ratio of the top 20 property insurers, 2004-5

144

Table 40: Premium income compared to combined ratio, top 20 property insurers, 2004-5

147

Table 41: Forecast commercial general insurance GWP, 2001-11f

150

Table 42: Group accident and health GWP forecast, 2001-11

154

Table 43: Forecast general liability GWP, 2001-11

157

Table 44: Commercial motor market GWP forecast. 2001-2011f

159

Table 45: GWP forecast for commercial pecuniary loss, 2001-11

162

Table 46: Forecast commercial property GWP, 2001-11f

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List of Figures

Figure 1: Soft market conditions were evident in many lines in 2005

27

Figure 2: Commercial motor and property saw declines in GWP in 2005

29

Figure 3: In 2005, group accident and health grew faster than the historical five year trend, while commercial property fell well below

30

Figure 4: The underwriting profit of the general insurance market deteriorated in 2005 as the market slipped off its peak

33

Figure 5: The group accident and health sector picked up in 2005, recording strong GWP growth

35

Figure 6: Individual and group accident, and 'other' accident and health business GWP fell in 2005

37

Figure 7: The accident and health underwriting result declined in 2005, but the market still returned a comfortable profit

38

Figure 8: Lloyd's and other non-ABI companies win market share from the company market and account for the accident and health market's expansion

40

Figure 9: The liability market achieved moderate growth, in spite of a decline in employers' liability

42

Figure 10: The underwriting result for general liability has improved sharply since 2001

44

Figure 11: Company players won market share from Lloyd's players as the liability market saw little growth

46

Figure 12: Both private and commercial motor GWP continued to decline and have stagnated since 2001

48

Figure 13: The performance of the commercial motor market's sub sectors diverged in 2005

49

Figure 14: Motor underwriting losses increased in 2005

51

Figure 15: Underwriting profits suffer in the commercial motor market in 2005

52

Figure 16: Lloyd's has continued to reduce exposure to motor, with some former Lloyd's players writing from offshore locations accounting for the increase in other

54

Figure 17: Pecuniary loss is a profitable line, and the profit recorded in 2005 is near the record for the decade

57

Figure 18: The majority of pecuniary loss insurance is underwritten by ABI members

59

Figure 19: Commercial property GWP declined in 2005, having slowed significantly in 2004

61

Figure 20: Profits fell slightly in 2005, as the effect of increased competition began to have an impact

63

Figure 21: The commercial property insurance underwriting result fell by over a third in 2005

64

Figure 22: The vast majority of property business remains with ABI companies but the amount written outside the company market has grown

66

Figure 23: National brokers dominate the distribution of commercial insurance

72

Figure 24: imarket generates a number of quotes, while the user only has to input the risk details once

74

Figure 25: The top 10 commercial insurers together accounted for 68.2 per cent of the market in 2005

86

Figure 26: There are some fast growing commercial insurers in the group ranked 11-20

90

Figure 27: Commercial business was more important than personal business for most of the top 10 commercial insurers in 2005

93

Figure 28: Many PMI players in the accident and health sector recorded an increase in their loss ratio

97

Figure 29: Expense ratio changes varied in the accident and health sector in 2005, but many PMI providers' ratios deteriorated slightly

100

Figure 30: Most liability insurers achieved improvements in loss ratio in 2005 and many also saw their premium income grow

107

Figure 31: The majority of the top 20 liability insurers saw increases in their expense ratios in 2005

110

Figure 32: The majority of liability insurers improved their combined ratios in 2005

113

Figure 33: Softening market conditions clearly affected the loss ratio of the top motor insurers

119

Figure 34: Most motor insurers saw only relatively small changes to their expense ratios in 2005

122

Figure 35: The four largest motor insurers have combined ratios below the top 20 average

128

Figure 36: Pecuniary loss insurers generally have low loss ratios, but expense ratios vary by line of business

133

Figure 37: On average property insurers increased premium income in 2005, but also saw their loss ratios rise

139

Figure 38: With the exception of a few companies like Lloyds TSB, NIG and Ecclesiastical, most property insurance providers saw expense ratios rise in 2005

143

Figure 39: Key to the relative importance of forecast variables

148

Figure 40: The total commercial insurance market is expected to grow between 2006 and 2011

149

Figure 41: Key variables influencing GWP in the accident and health market, 2006f-11

151

Figure 42: The group accident and health market is forecast to achieve a compound annual growth rate of 4.8% between 2006 and 2011

153

Figure 43: Key variables affecting liability GWP, 2006-11

155

Figure 44: The liability market is expected to see strong growth between 2008 and 2010

156

Figure 45: Key variables affecting commercial motor GWP, 2006e-11f

158

Figure 46: GWP is forecast to begin growing again in 2007 as the motor market recovers

159

Figure 47: Commercial pecuniary loss is forecast to grow by a compound annual growth rate of 10.0 per cent between 2006 and 2011

161

Figure 48: Key variables affecting commercial property GWP, 2006e-11f

163

Figure 49: Commercial property GWP will decline until 2008 when rates are expected to rise again

164