Table of Contents

Overview

1

Catalyst

1

Summary

1

Executive Summary

2

The commercial motor market declined in 2006, before growing marginally in 2007

2

Commercial motor GWP contracted to £3.37 billion in 2006 before a modest recovery in 2007

2

GWP was influenced by declines in premium rates and slow growth in vehicle numbers in 2006 and 2007

2

The commercial motor parc grew in 2006, though the number of company cars fell

2

Competitive pressures have forced down premium rates in both segments of the commercial motor market

3

Commercial motor underwriting profits unexpectedly rose in 2006 as outgoings fell

3

Brokers continued to dominate the distribution of commercial insurance

4

National brokers have lost distribution market share to the direct channel, chain brokers and telebrokers

4

The direct channel increased its share of commercial insurance GWP by 1% in 2006

4

Many top 10 commercial motor insurers experienced shrinking books in 2006

4

The market remained highly concentrated despite the top 10 losing market share

4

The average combined ratio of the top 10 motor insurers declined by four percentage points in 2006

5

The commercial motor market is forecast to harden in 2008 and reach £4.1 billion by 2012

5

The commercial motor market is forecast to harden in 2008 and reach £4.1 billion by 2012

5

Commercial motor underwriting profits are forecast to reach a height of £327 million in 2010

6

Table of Contents

7

Table of figures

8

Table of tables

9

Market Context

10

Introduction

10

The commercial motor market declined in 2006, before growing marginally in 2007

10

Commercial motor GWP contracted to £3.37 billion in 2006 before a modest recovery in 2007

10

Commercial motor premium income contracted by 1% in 2006, driven by premium rate decreases

10

The commercial motor insurance market grew slightly in 2007 and was worth an estimated £3.4 billion

10

Fleet premium income contracted in 2006 but rebounded slightly in 2007

11

The commercial vehicle market declined slightly in 2006 before increasing by an estimated 1.3% in 2007

12

GWP was influenced by declines in premium rates and slow growth in vehicle numbers in 2006 and 2007

13

The commercial motor parc grew in 2006, though the number of company cars fell

13

Company cars declined as a proportion of the commercial motor parc

15

Company cars fell as a proportion of the total car parc

17

New registrations were down in 2006 as fewer new goods vehicles, buses and coaches were registered

19

New company car registrations also declined as a proportion of car registrations in 2006

20

Competitive pressures have forced down premium rates in both segments of the commercial motor market

22

Fleet premium rates saw declines in 2006 and 2007 due to competitive pressure

22

Commercial vehicle premium rates have come under pressure from insurers targeting SME business

22

Commercial motor underwriting profits unexpectedly rose in 2006 as outgoings fell

22

Underwriting profits increased to £244 million in 2006, despite the soft market

22

The drop in total outgoing was caused by a decrease in claims incurred, as commissions and expenses grew

25

Claims incurred dropped as a proportion of total outgoings in 2006

25

Growth in commissions and expenses constrained the growth in profits

26

Claims inflation remains dominated by rising personal injury costs, though falling accident rates have given insurers some respite

26

Overall claims inflation increased significantly in 2006

26

Bodily injury claims are more expensive than other claims

28

Falling road traffic accident rates will have given insurers some respite on their claims bills

29

Road traffic accident numbers have declined over the last nine years

29

Road traffic accidents have declined even as car numbers have increased, representing a fall in frequency

31

Casualty rates have fallen steadily, mirroring the decline in road traffic accidents in 2006

33

Theft rates continue to fall, representing a positive trend for private motor insurers

35

Insurers have tried a variety of solutions to limit the cost and volume claims caused by traffic accidents

37

Some early adopters have begun using telematics to control fleet claims costs

37

Smart Drive and online training have also been used to correct bad driving behavior

37

Insurers remain divided over whether rehabilitation offers real savings on claims costs

38

The commercial and private motor market both contracted in 2006 but diverged in terms of profits

38

The private motor market contracted along with the commercial market in 2006

38

The total motor market's underwriting loss increased marginally to £204 million in 2006

40

Despite both being in a soft market, the private and commercial markets record very different underwriting results

42

Distribution Dynamics

45

Introduction

45

Brokers continued to dominate the distribution of commercial insurance

45

National brokers have lost distribution market share to the direct channel, chain brokers and telebrokers

45

The direct channel increased its share of commercial insurance GWP by 1% in 2006

45

Affinity groups remain a small channel for the distribution of commercial insurance

46

Banks and building societies continue to play a small role in the distribution of commercial insurance

46

Commercial motor is the line of business most at risk to the direct channel

48

The SME market is dominated by brokers but direct players have grown

49

Most SMEs buy insurance via brokers, but direct insurers also distribute a significant part of the market

49

Brokers remain the top choice for SMEs to approach if they had to switch provider

50

Many SMEs are willing to consider alternative channels when prompted

51

Up to 44% of SMEs would consider using a bank as an insurance provider

51

Almost three quarters of SMEs would be willing to consider direct insurers, in the hope of cost savings

52

Buying insurance via the internet and telephone is becoming more popular with SMEs

53

Many SMEs are open to purchasing insurance by telephone

53

Even more SMEs are willing to buy their insurance via the internet, showing the potential of this platform

54

Commercial motor and property insurance are most likely to be purchased through alternative platforms

55

Only a small group of SMEs are willing to switch provider, usually for a lower price

56

Almost 90% of SMEs are not considering a change of provider in the next year

56

Only 16% of SMEs have changed insurance provider in the last two years

57

One in 10 SMEs are considering switching their insurance provider in the next 12 months

58

Competitor Focus

59

Introduction

59

A few new competitors entered the market in 2007

59

Direct Line entered the commercial market with an SME targeted proposition in 2007

59

LV's broker arm ABC Insurance launched its first products in 2007 with commercial motor policies to follow

59

Underwriting agency Arista rolled out multiple products for the commercial motor market in 2007

59

Many top 10 commercial motor insurers experienced shrinking books in 2006

60

The market remained highly concentrated despite the top 10 losing market share

60

The soft market led to a reduction in market share for four of the top 10 commercial motor insurers in 2006

61

Norwich Union continued to lose market share in 2006

61

Zurich experienced a contracting book in 2006, leading to a decline in its commercial motor market share

61

Allianz suffered a decline in its commercial motor market share in 2006 due to the competitive market

61

Brit's market share declined marginally as premium income fell by 3.4%

62

Four top 10 commercial motor insurers increased market share in 2006

62

NFU Mutual expanded its commercial motor book in 2006, leading to an increase of market share to 5.5%

62

QBE increased market share in 2006 by maintaining its premium income despite soft market conditions

62

AXA increased market share in 2006 by rebuilding its commercial motor book

62

NIG grew its market share by 0.4 percentage points in 2006 and achieved growth of 10.9% in GWP

63

Two competitors saw no change in market share in 2006

63

The market leader Royal & SunAlliance maintained its market share in 2006 at 18.2%

63

Highway pursued a more selective commercial motor strategy in 2006 that led to a decline in premium income

63

Mid-sized commercial motor insurers gained market share in 2006

65

The majority of insurers ranked 11-20 gained market share in 2006

65

Tradex and CIS lost market share in 2006, while St Paul and Ecclesiastical saw no changes

66

Tradex declined to 1.5% of the commercial motor market in 2006

66

CIS's market share in commercial motor declined in 2006

66

St Paul and Ecclesiastical's market share was unchanged in 2006

66

A majority of the top 10 have mixed motor insurance portfolios

69

Fleet premium income dominated the commercial motor books of the largest insurers in 2006

69

The top 10 commercial motor insurers are also active in the private motor market

71

Private motor dominates the books of the top 10 motor insurers

73

The average loss ratio among the top 10 UK motor insurance providers declined in 2006 with AXA, Norwich Union and Churchill recording the biggest improvements

74

In 2006, the average loss ratio of the top 10 UK motor insurers fell by 3.3 percentage points to 71.1%

74

AXA, Norwich Union and Churchill recorded the strongest loss ratio reductions

74

Four insurers recorded loss ratio deterioration

75

The average expense ratio of the top 10 UK motor insurers declined by 0.7 percentage points in 2006, with Churchill, AXA, NIG and Royal & SunAlliance recording above-average reductions

77

The average expense ratio of the top 10 UK motor insurers declined by 0.7 percentage points in 2006

77

Churchill, AXA, NIG and Royal & SunAlliance recorded above-average expense ratio decline

77

Norwich Union, Zurich and NFU Mutual recorded the highest increases in their expense ratios

78

The average combined ratio of the top 10 motor insurers fell by four percentage points in 2006, with AXA and Churchill seeing significant declines

80

The average combined ratio of the top 10 motor insurers declined by four percentage points in 2006

80

AXA and Churchill recorded significant reductions in combined ratio in 2006

81

NIG, Direct Line and Zurich recorded combined ratio increases

81

Future Decoded

84

Introduction

84

The commercial motor market is forecast to harden in 2008 and reach £4.1 billion by 2012

84

Premium rate increases are expected to lead to an improvement in the commercial motor market

84

The UK commercial motor insurance market is forecast to reach a value of £4.1 billion in 2012

85

Commercial motor underwriting profits are forecast to reach a height of £327 million in 2010

87

More competitive pricing will depress future commercial motor market performance

89

In the pessimistic scenario, competitive pricing will depress premium income growth

89

The market will reach a value of £3.9 million in 2012 under more competitive conditions

90

The market will make a loss of £17m in 2012, the last year of the forecast period

92

The pessimistic scenario results in £44 million less profit for insurers

94

The total motor market, under neutral conditions, will reach a value of £16.6 billion in 2012

96

The total motor market is forecast to grow at 4.3% a year in the forecast period

96

The total market is forecast to return an underwriting profit in 2008

98

APPENDIX

101

Supplementary data

101

Motor vehicles registered by taxation class

101

Definitions

102

Premium income measures

102

Earned premiums

102

Gross Premium

102

Net Premium

102

Written premiums

102

Definitions of ABI terms

102

Brokers

102

National brokers

102

Other intermediaries & brokers

102

Chain brokers & telebrokers

103

Direct

103

Other company agents

103

Utilities/retailers/affinity groups

103

Company staff

103

Banks/building societies

103

SME

103

2005-06 definitions for line of business

103

Motor

103

Total private motor

103

Total commercial motor

104

Private motor comprehensive

104

Private motor non-comprehensive

104

Motorcycle

104

Fleets

104

Commercial vehicles (non-fleet)

105

Pre-2005 definitions for lines of business

105

Motor

105

Methodology

105

Primary and secondary research

105

Market size

106

Changes in market size information

106

Market size methodology

106

Lloyd's players and underwriting result figures

106

Competitor data

106

CIS

106

Home-foreign, overseas and facultative reinsurance business

107

UK commercial broker survey H2 2007

107

Datamonitor's SME Insurance Survey Q1 2007

107

Further reading

108

Ask the analyst

108

Datamonitor consulting

109

Disclaimer

109

List of Tables

Table 1: Commercial motor GWP, 2002-07e (£m)

11

Table 2: Commercial motor GWP, by line of business, 2002-07e (£m)

13

Table 3: Commercial motor parc in Great Britain by body type, 2002-06 (000s)

15

Table 4: Commercial motor parc in Great Britain by body type, 2005-06 (000s)

17

Table 5: Company car parc's share of total car parc, 2002-06 (000s)

18

Table 6: New commercial vehicle registrations in Great Britain by body type, 2002−06 (000s)

20

Table 7: Company cars new registrations in Great Britain, 2002-06 (000s)

21

Table 8: Commercial motor underwriting account, 1996-2006 (£m)

24

Table 9: Net claims as proportion of total outgoings, 2002-06 (£m)

25

Table 10: Total commercial motor gross claims costs, 2002-06 (£m)

25

Table 11: Detailed commercial motor underwriting account, 2002-06 (£m)

26

Table 12: Average motor claims costs, 2002-06, (£)

27

Table 13: UK average claims cost of bodily injury claims notified two years previous, 2002-06, (£)

29

Table 14: Total number of road accidents in the UK, 1996-2006 (000s)

31

Table 15: Road traffic accidents relative to registered vehicles in Great Britain 1996-2006 (000s)

33

Table 16: Deaths, seriously and slightly injured casualties resulting from road traffic accidents, 2002-06

34

Table 17: Theft of and from motor vehicles, 1996-2006/7

36

Table 18: UK motor insurance GWP, 2002-06 (£m)

39

Table 19: UK motor insurance underwriting account 1996-2006 (£m)

41

Table 20: Private and commercial motor underwriting results, 1996-2006 (£m)

44

Table 21: Market share of distribution channels in the commercial general insurance market, 2003-6

47

Table 22: Market share of the market leader, the rest of the top 10 and the remainder, 1996, 2005, 2006

61

Table 23: Top 10 commercial motor insurers by market share, 2002-06 (%)

64

Table 24: Top 10 commercial motor insurers by premium income, 2002-06 (£000s)

65

Table 25: Commercial motor insurers ranked 11-20 by market share, 2002-06 (%)

68

Table 26: Premium income of commercial motor competitors ranked 11-20, 2002-06 (£000s)

69

Table 27: Top 10 commercial motor insurers' fleet and commercial vehicle shares of total GWP, 2006 (£000s)

71

Table 28: Split between commercial and private markets for the top 10 commercial motor insurers, 2006 (£000s)

72

Table 29: Top 10 motor insurers' GWP split by private and commercial, 2006 (£000s)

74

Table 30: Change in premium income compared to change in loss ratio, top 10 UK motor insurers, 2005−06

77

Table 31: Change in premium income compared to change in expense ratio, top 10 UK motor insurers, 2005−06

80

Table 32: Change in premium income compared to change in combined ratio, top 10 UK motor insurers, 2005−06

83

Table 33: Key variables affecting commercial motor insurance GWP, neutral scenario, 2002-12f

85

Table 34: UK commercial motor insurance GWP forecast, neutral scenario, 2002-12f (£m)

87

Table 35: UK commercial motor insurance underwriting account forecast, neutral scenario, 2002-12f (£m)

89

Table 36: Key variables affecting commercial motor insurance GWP, pessimistic scenario, 2002-12f

90

Table 37: UK commercial motor insurance GWP forecast, pessimistic scenario, 2002-12f (£m)

92

Table 38: UK commercial motor insurance underwriting account forecast, pessimistic scenario, 2002-12f (£m)

94

Table 39: UK commercial motor underwriting result forecast, neutral and pessimistic scenarios, 2002-12f (£m)

96

Table 40: Total motor insurance GWP forecast, neutral scenario, 2002-12f (£m)

98

Table 41: UK total motor insurance underwriting account, 2002-12f (£m)

100

Table 42: Motor vehicles registered by taxation class, 2002−06 (000s)

101

Table 43: New motor vehicle registrations by taxation class, 2002-06 (000s)

102

Table 44: Q: "What business sector are you involved in?"

107

Table 45: Q: "How large is your company in terms of number of employees?"

108

Table 46: Q: "How large is your company in terms of turnover?"

108

List of Figures

Figure 1: Commercial motor vehicles continued to increase in number in 2006

3

Figure 2: The top 10 commercial motor insurers have grown their share of the market since 1996

5

Figure 3: Commercial motor premium income grew slightly in 2007 after three years of declines

11

Figure 4: The commercial motor market declined in 2006 but saw a small increase in 2007

12

Figure 5: Commercial motor vehicles continued to increase in number in 2006

14

Figure 6: Light goods vehicles and company cars account for most of the commercial motor parc

16

Figure 7: The company car parc has remained largely stable as a proportion of the overall car parc

18

Figure 8: New registrations of commercial motor vehicles fell in 2006

19

Figure 9: New registrations for company cars declined after a rally in 2005

21

Figure 10: Despite falling NWP, the market attained its highest underwriting profit in 2006

23

Figure 11: Average motor claims costs have risen every year since 2002 in the UK

27

Figure 12: The average UK claims cost for bodily injury claims was higher than for other claim types in 2006

28

Figure 13: Road accidents peaked in 1997 and have fallen ever since

30

Figure 14: Accidents in the UK have fallen despite a steady increase in the number of vehicles

32

Figure 15: Casualties continued to decline across all categories in 2006

34

Figure 16: Theft of and from motor vehicles continued to decline in 2006/7

35

Figure 17: Commercial motor GWP declined slightly more than private motor in 2006

39

Figure 18: The UK motor insurance market reported a loss of £204 million in 2006

40

Figure 19: The private and commercial motor underwriting results diverged after 2001

43

Figure 20: National brokers dominate the distribution of commercial general insurance in the UK in terms of GWP

47

Figure 21: Commercial motor is the line of business most at risk to the direct channel

48

Figure 22: The distribution of insurance to SMEs remained largely under the control of brokers in 2007

49

Figure 23: SMEs have become more likely to consider direct insurers if they were to change provider

50

Figure 24: The prospect of cheaper premiums is the primary reason given for being willing to consider using a bank as an insurance provider

51

Figure 25: Price is the top reason given by SMEs that would consider switching to a direct insurer

52

Figure 26: Speed of concluding their insurance purchase is the primary reason given by SMEs willing to consider buying via the telephone

53

Figure 27: SMEs are willing to consider buying via the internet if it is quicker and cheaper than other platforms

54

Figure 28: Over half of SMEs would consider buying commercial motor online or via the telephone

55

Figure 29: Most SMEs do not consider dropping their current insurance provider

56

Figure 30: The number of SMEs staying with their provider for more than five years has increased since 2005

57

Figure 31: The price of insurance premiums is the most important reason why some SMEs plan to change insurance provider in the next year

58

Figure 32: The top 10 commercial motor insurers have grown their share of the market since 1996

60

Figure 33: The top insurers retained a firm grip on the market in 2006 with a 76.3% market share

64

Figure 34: Mid-tier competitors accounted for 10.5% of the commercial motor market in 2006

67

Figure 35: Most of the top 10 commercial motor insurers' books are dominated by fleet business

70

Figure 36: Most of the top 10 commercial motor insurers also have a large presence in the private market

72

Figure 37: The top private insurers dominate the top motor rankings due to the size of their private books

73

Figure 38: While the average loss ratio of the top 10 UK motor insurers fell in 2006, NIG and Direct Line saw increases in their ratios

76

Figure 39: Norwich Union saw the biggest increase in private motor expense ratio in 2006

79

Figure 40: NIG saw the biggest increase in combined ratio in 2006

82

Figure 41: The commercial motor market is predicted to harden in 2008, resulting in an increase in GWP

86

Figure 42: The market is forecast to return underwriting profits between 2008 and 2012

88

Figure 43: Future market size is constrained by more competitive pricing in the pessimistic scenario

91

Figure 44: Underwriting profits are forecast to decline quickly after 2009 in the pessimistic scenario

93

Figure 45: The forecast underwriting results of the two scenarios diverge after 2009

95

Figure 46: After four years of declines, the total motor market is expected to begin growing again in 2008

97

Figure 47: The motor market is forecast to be profitable for a total of four years starting in 2008

99