UK: Mild Optimism. The Future of the U.K Household Insurance Market

Last Updated: 7 April 2005

Article by Harold Clarke, James Rakow and Catherine Barton

Contents

  • Mild Optimism
  • Changing The Face Of Distribution
  • Premium And Loss Trends
  • Small Is No Longer Beautiful

Mild Optimism

Introduction

Deloitte has always maintained that while the performance of the motor market is driven by premiums, the household insurance cycle is influenced most heavily by claims. So the recent increases in insurance spending, coupled with a relatively benign few years in terms of catastrophes, has meant the outlook for household is fairly optimistic.

The emphasis, though, has to be on that qualifier: fairly – our optimism is no more than mild. Part of the reason is that dramatic market swings appear to be a thing of the past. While expenses continue to show a certain amount of volatility, the rest of the landscape looks fairly stable – the claims hangover we expected from the 2003 dry summer didn’t seem to happen, and apart from Boscastle there were no major disasters or adverse trends in perils. The improvement in fire and theft claims also looks like levelling out in the coming years.

There are certainly interesting things happening in distribution, but perhaps the biggest challenge for insurers comes from an analysis of the market figures. Few of us would like the market to become more volatile, since that usually means great losses, but since the volatility seems to have left the market, so too have more than adequate profits. We may be optimistic, but is mild enough?

Review of the market

The main category in the FSA Returns is Property which covers Commercial and Household business. In order to identify the trends in the Household market we have considered the FSA returns at both the accounting class and risk group levels. At the class level only those insurers whose property portfolio contains more than 75% household business were included in the review.

Gross written household premiums have risen steadily from just over £4 billion in 2000 to just under £6 billion in 2003. During that period the Net Operating Ratio ("NOR") has been around 100%. However the make up of the NOR has changed over the period with the Net Expense Ratio increasing from 35% to 41% while the Net Loss Ratio has decreased from 68% to 59%.

Individual insurers

The market movements conceal the usual variety of individual performances. The average gross loss ratio was 58% and of the four big players who control around half the market, Royal & SunAlliance and Norwich Union outperformed while Zurich and Churchill had just worse than the average market gross loss ratio.

Lloyds TSB’s good gross loss ratio result looks much more average when expenses are taken into account. With Direct Line, however, it is the opposite story, with their very good NOR being due to a much lower than average expense ratio.

Expenses have also been a decisive factor in the performance of Esure whose rapidly reducing expenses have brought its NOR down from 244% to 149%. It will be one to watch for next year. Other notable movers were Prudential whose over 50 percent decline in market share was balanced by gains from Churchill.

Review of perils

While last year’s subsidence claims turned out worse than we had expected (£390million), 2004 did not show signs of the ‘hangover’ effect we saw in the mid-90s, a sign perhaps of proactive claims management within the industry. Since 2004 was much damper, the forecast for 2005 should be closer to £200 million.

Freeze and flood claims were also low, with Boscastle the only notable incident. The ABI has changed the way it compiles its statistics, however, so the figures now do not include domestic incidents such as flooding from washing machines.

With no major dramatic storms in 2004 either, wind perils seem reasonably benign, while the average size of fire claims continues to rise alongside the fall in UK unemployment. The number of claims, though, is falling – a pattern repeated in theft claims which have shown a downward trend since the early 1990s. However, it will be interesting to see if we have a continuation of the striking 12% reduction from 2002 to 2003.

Changing face of distribution

Our recent survey of insurance industry leaders elicited two particularly interesting responses on the subject of distribution. Firstly, when asked whether insurers or intermediaries had the upper hand in the industry, 43% thought the relationship was equal. Asked for their thoughts on how distribution might change in the coming years, 50% pointed to internet growth as the major new channel.

Both responses confirm what our analysis has shown – we are seeing significant shifts in the way the market is structured, but not the emergence of a single dominant form of distribution. To meet the consumer demand for a wide range of service and the insurers’ drive for volume, the dominant strategy is to develop multiple channels to market.

Broker consolidation

Although independent brokers have continued to lose market share to banks, building societies and the brands, they are still the largest single channel for household insurance. As a recent Insurance Times survey showed, the phone and increasingly the internet may be major channels for motor insurance, but in household face-to-face remains as important as purchasing by post.

There is therefore plenty of consolidation activity among broker firms with their rise in income fuelled by mid-market acquisitions in the regions. This trend should continue as large insurers such as Norwich Union turn away from brokers in favour of other distribution channels, and smaller brokers struggle with new FSA regulations and the burden of keeping up with costly technical upgrades.

Another driver behind the consolidation of the broker market is the age of the owners of independent businesses, many of whom are reaching retirement age and looking to sell their businesses. With brokers still playing a key role in the market, the better performing companies will remain attractive acquisitions for their peers and insurers.

Other forms of distribution

There is increasing evidence, however, that the larger insurance companies are placing more emphasis on direct distribution, which looks set to become the largest channel by 2006. The difficulty insurers face, however, is raising brand awareness, and the growth in advertising spend is rapidly making this channel prohibitive to new entrants.

This is where banks and building societies have a distinct advantage. Having increased their share of household distribution, largely on the back of increased mortgage lending, they have been able to exploit their naturally strong marketing capabilities – 84% of their marketing spend is currently going on direct mail, sent out with regular communications such as bank statements.

In this climate, it is no surprise brands such as Boots, Marks & Spencer and Tesco are looking to gain market share on the back of their reputation and broad customer base. The key to success in this area, however, is in a good partnership arrangement between insurers, who can provide the product, and distributors who can offer the potential volume of sales.

The multi-channel imperative

Some businesses continue to look for new niches such as the ‘mid-net worth’ sector, while Norwich Union is starting to compete against NFU Mutual’s continued dominance of the rural property sector. Specialisation, whether in markets or types of distribution will continue. However, all the major insurers now have direct arms and broker clubs, branded and affinity relationships, and links with banks and building societies. In a hardening market, they want profitability and volume – and the central strategy for delivering this is multi-channel distribution.

Premium and loss trends

Last year we forecast that premiums would rise by 7%, against an actual result of 6.5%. We forecast 5% for 2004 and we expect to remain at this level for 2005, after considering influences such as inflation, the increased level of insurance penetration and demographic changes such as the rise of single occupancy households.

We forecast a 5% aggregate rise in theft and fire claims, although it will be interesting to see if the government’s current anti-smoking push will result in a medium-term decline in fire claims. Another benign year in terms of weather, suggests that wind, flood, and subsidence claims should remain at the average level for the past five years, while in 2004 we have allowed about £30 million to come through for Boscastle.

Expenses and reinsurance

There was a big spike in 2001 to 37% and a fall back to 33% the following year. We called another improvement for 2003, but 2001 turned out not to be a blip after expenses rose back to 37% again for 2003. We are therefore taking the middle ground for 2004-5 and calling 35%. One of the key factors to consider here is the balance between the insurers and the distributors because commission rates will clearly have a big influence on the final result. We’re assuming that much the same level of premium will be ceded to reinsurers. We thought 2004 might see the market softening, but after the events in Florida, rates will probably remain at the current level for another year.

The Deloitte view of future profitability

Our benchmark for an adequate performance is a NOR of 100%. For 2003 the results was 102% - with a 65% Net Loss Ratio and 37% Net Expense Ratio. However, since 2004 has been fairly kind on the claims front, and because of some good premium growth, it looks like we might see a 96% NOR result for that year.

Small is no longer beautiful

2004 has proved to be one of the most benign years on record and 2005 looks like offering a similar level of profitability. So there are some causes for optimism – but two good reasons to be wary. Firstly, with profits very much in the margins a single period of bad weather will spoil the party. Secondly, the current benign climate gives no more than an adequate return – and not the kind businesses or investors would ideally like to see. Any optimism will be short lived unless rates start to harden.

And this opens up a larger question – if insurers are barely getting the profits they need during one of the market’s most benign periods, why write household insurance at all? It is true that on top of the forecast 4% underwriting profit for 2004, businesses can benefit from investment income, but the question still remains: why household?

The only answer is that the household market has to raise its profitability on a consistent basis – and since there is little volatility in the results, that means increasing margins, particularly on expenses.

Perhaps the most important step, however, is in attitude. Many companies tend to accept that in household insurance a small profit is a good profit. They should start to challenge that assumption, and instead of welcoming the lack of significant loss events, should ask why these benign conditions produce a result no better than 96%.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions