UK Commercial Property Insurance 2005

TABLE OF CONTENTS

CHAPTER 1 EXECUTIVE SUMMARY 3

Introduction 3

Market context 3

Distribution 4

Targeting SME customers 5

Competitive dynamics 6

The future decoded 6

CHAPTER 2 INTRODUCTION 23

What is this report about? 23

Who is the target reader? 24

How to use this report 24

CHAPTER 3 MARKET CONTEXT 25

Introduction 25

Market size 25

The market grew by 24 per cent in 2003, but rates have since softened 25

Commercial property underwriting result 27

The commercial property market was even more profitable in 2003 27

Commercial property claims 30

Claims costs by peril 30

Fire claims numbers increased but there was a decline in the number of large fires 32

Theft claims dropped slightly in 2003 36

Weather claims costs dropped due to the absence of severe weather 37

Business interruption declined as a result of falls in fire and weather claims 38

Market issues 39

The market is softening 39

Fire Service reforms could impact claims costs 41

Climate change will lead to more frequent and serious weather events resulting in increased claims costs 42

Insurers are concerned that Pool Re might not pay out in the event of a terrorist attack 44

CHAPTER 4 DISTRIBUTION 46

Introduction 46

Distribution channel splits 46

Multinational brokers remain the dominant force in commercial insurance distribution 46

The direct channel is slowly gaining market share 50

Company staff and tied agents account for only a small proportion of insurance distribution 51

Banks and building societies aim to increase their share of the commercial insurance market 51

The market share of utilities/retailers/affinity groups remains static 52

Issues affecting distribution 52

imarket is growing in popularity as brokers and insurers seek to interact as efficiently as possible 52

Broker networks are a growing feature of the market 55

CHAPTER 5 TARGETING SME CUSTOMERS 57

Introduction 57

SMEs currently purchase property insurance through brokers and are largely satisfied with their relationships 57

Most SMEs buy their property insurance through a broker 57

Broker satisfaction levels are currently high 58

SMEs have fairly long-term relationships with their brokers 59

The price-sensitivity of SMEs presents opportunities for providers to win business from their competitors 60

Price is the most important factor behind SMEs� purchase decision 60

The SMEs that have switched provider in the last two years have largely done so on the basis of price 62

Around 20 per cent of SMEs are considering changing their broker in the next 12 months for a cheaper premium 62

Price-based competition in the SME sector is increasing 63

Several insurers and brokers have been increasing their focus in this area 63

Premium rates freeze for over one-third of SMEs 65

Over 10 per cent of SMEs saw a decrease in their property premiums at last renewal 65

Alternative distribution channels could threaten broker dominance if pricing and product offering were right 66

Over 60 per cent of SMEs would consider buying property insurance direct if they were offered a better package 66

Almost 40 per cent of SMEs say they would consider buying insurance from a bank or building society if they got a better deal 69

However, price alone is not enough to win SME customers 70

A significant majority of SMEs would not consider alternative distribution channels regardless of price, as they are content with their existing relationship with their broker and value their expertise 70

Brokers can influence SME purchasing behavior through their reputation and service levels 71

The bancassurance channel faces greater obstacles than the direct channel 73

Additional services are valued by the SMEs that receive them, but there is no real desire for an increase in such services 73

Almost 50 per cent of SMEs receive no additional services from their broker 73

Additional services are currently included as standard 74

The SMEs that do receive additional services find them useful 75

However, the vast majority of SMEs feel no need for any further services from their broker 76

CHAPTER 6 COMPETITIVE DYNAMICS 78

Introduction 78

Top 10 commercial property insurers 78

Zurich FS, NIG and FM Insurance all gained market share in 2003 78

Six players lost market share, including market leader, Norwich Union 79

Market share remained static for Ecclesiastical 79

The top 10 insurers lost market share to players outside the top 20 in 2003 82

Claims ratios of the leading commercial property insurers 84

All top 10 insurers reduced their gross claims ratio in 2003, largely due to robust premium rate increases and benign weather conditions 84

FM Insurance had the lowest gross claims ratio of the top 10 insurers in 2003 87

The unique business model of FM Insurance has led to falling ratios and a pay back plan for its customers 88

Royal & SunAlliance has benefited from lower fire claims and improved risk assessment 90

New Hampshire maintained its low claims ratio in 2003 92

Ecclesiastical�s claims ratio fell in 2003, but the reduction was tempered due to increases in arson attacks on schools and churches 94

NIG combined aggressive premium growth with an improved claims ratio in 2003 96

AXA benefited from a decrease in fire claims during hard market conditions 97

Allianz benefited from the greatest improvement in gross claims ratio of the top 10 insurers in 2003 99

Zurich FS�s claims ratio fell by almost 50 per cent due to the acquisition of good quality risks and a decrease in fire claims in 2003 100

Norwich Union�s gross claims ratio fell marginally between 2002 and 2003 102

NFU Mutual had the highest gross claims ratio of the top 10 insurers due to higher than average fire claims and unprofitable livestock/bloodstock business 103

Lloyd�s market 105

Property premium income at Lloyd�s grew strongly in 2003 105

Competitive issues 106

Several insurers are increasing capacity 106

Insurers are developing their products 107

CHAPTER 7 THE FUTURE DECODED 108

Introduction 108

Forecast commercial property GWP 108

The market will soften until 2007 108

Forecast underwriting result 112

CHAPTER 8 APPENDIX 114

Supplementary data 114

Market context 114

Distribution 115

Acts of terrorism 116

Commercial property GEP by competitor 117

Commercial property market share by competitor 120

Property insurance performance ratios by competitor 122

SME survey tables 139

Brokers dominate the sale of commercial property insurance 139

The price-sensitivity of SMEs presents opportunities for providers to win business from their competitors 141

Price-based competition in the SME sector is increasing 143

Alternative distribution channels could threaten broker dominance if pricing and product offering were right 144

Additional services are valued by the SMEs that receive them, but there is no real desire for an increase in such services 145

Definitions 147

DTI definitions of SME businesses 149

Research methodology 150

Datamonitor�s SME Insurance Survey 150

Explanatory notes to competitor tables 153

Current publications 158

Future publications 158

Do you need more information? 158

Datamonitor Financial Services Consulting 158

SPP writing team 160

How to contact experts in your industry 162

LIST OF TABLES

Table 1: Average premium rate movements, 2004-5 25

Table 2: Commercial property insurance GWP, 1999-2003 26

Table 3: Commercial property insurance underwriting account, 1999-2003 28

Table 4: Commercial property claims, expense and underwriting ratio, 1999-2003 29

Table 5: Commercial property gross incurred claims by peril, 1999-2003 32

Table 6: Total number of property fires in the UK by type, 1998-2003p 33

Table 7: Number and average value of commercial property theft claims, 1999-2003 37

Table 8: Cost of business interruption claims by cause, 1992-2003 39

Table 9: Market share of distribution channels in the commercial general insurance market, 2002-4 49

Table 10: Market share of top 10 commercial property insurers, 1999-2003 82

Table 11: Market share of the top 10 commercial property insurers compared with those ranked 11-20 and those outside the top 20, 1999-2003 83

Table 12: Gross claims ratio and GEP of top 10 commercial property insurers, 2002-3 86

Table 13: Claims incurred, GEP and claims ratio for FM Insurance, 1999-2003 90

Table 14: Claims incurred, GEP and claims ratio for R&SA, 1999-2003 92

Table 15: Claims incurred, GEP and claims ratio for New Hampshire, 1999-2003 93

Table 16: Claims incurred, GEP and claims ratio for Ecclesiastical, 1999-2003 95

Table 17: Claims incurred, GEP and claims ratio for NIG, 1999-2003 97

Table 18: Claims incurred, GEP and claims ratio for AXA, 1999-2003 98

Table 19: Claims incurred, GEP and claims ratio for Allianz, 1999-2003 100

Table 20: Claims incurred, GEP and claims ratio for Zurich FS, 1999-2003 101

Table 21: Claims incurred, GEP and claims ratio for Norwich Union, 2001-2003 103

Table 22: Claims incurred, GEP and claims ratio for NFU Mutual, 1999-2003 104

Table 23: Property GWP split between Lloyd�s and ABI members, 1993-2003e 106

Table 24: Forecast GWP for the commercial property insurance market, 1999-2009f 110

Table 25: Forecast underwriting result for the commercial property insurance market, 2004e-2009f 113

Table 26: Total number of property fires in the UK, split by accidental and malicious, 1996-2001 114

Table 27: Total number of property fires in the UK, by industry, 1996-2001p 115

Table 28: Distribution channel splits 116

Table 29: Commercial property insurance GEP by competitor, 1999-2003 117

Table 30: Commercial property insurance GEP by competitor, 1999-2003, cont. 118

Table 31: Commercial property insurance GEP by competitor, 1999-2003, cont. 119

Table 32: Commercial property insurance market share by competitor, 1999-2003 120

Table 33: Commercial property insurance market share by competitor, 1999-2003, cont. 121

Table 13: Property loss ratio, by competitor, 1999-2003 122

Table 14: Property loss ratio, by competitor, 1999-2003, contd. 123

Table 15: Property loss ratio, by competitor, 1999-2003, contd. 124

Table 16: Property expense ratio, by competitor, 1999-2003 125

Table 17: Property expense ratio, by competitor, 1999-2003, contd. 126

Table 18: Property expense ratio, by competitor, 1999-2003, contd. 127

Table 19: Property combined ratio, by competitor, 1999-2003 128

Table 20: Property combined ratio, by competitor, 1999-2003, contd. 129

Table 21: Property combined ratio, by competitor, 1999-2003, contd. 130

Table 22: Property commission ratio, by competitor, 1999-2003 131

Table 23: Property commission ratio, by competitor, 1999-2003, contd. 132

Table 24: Property commission ratio, by competitor, 1999-2003, contd. 133

Table 25: Property management expenses ratio, by competitor, 1999-2003 134

Table 26: Property management expenses ratio, by competitor, 1999-2003, contd. 135

Table 27: Property management expenses ratio, by competitor, 1999-2003, contd. 136

Table 28: Property net / gross premium ratio, by competitor, 1999-2003 137

Table 29: Property net / gross premium ratio, by competitor, 1999-2003, contd. 138

Table 30: Property net / gross premium ratio, by competitor, 1999-2003, contd. 139

Table 34: Where do you purchase your commercial property insurance from? 139

Table 35: How satisfied are you with your commercial property insurance broker? 140

Table 36: How long have you been with your commercial property insurance broker? 140

Table 37: What were the most important reasons for choosing your current commercial property insurance broker? (multi-choice) 141

Table 38: Could you please rank the reasons for choosing your commercial property broker 141

Table 39: Why have you changed your commercial property insurance broker in the last two years? (multi-choice) 142

Table 40: Do you think you will change your commercial property insurance broker in the next 12 months? 142

Table 41: If yes, why? (multi-choice) 142

Table 42: What is the name of your commercial property insurer? 143

Table 43: Did your commercial property insurance premium change last year? 143

Table 44: If yes, by approximately what percentage? 143

Table 45: Would you consider buying commercial property insurance direct from an insurance company? 144

Table 46: If yes, why? (multi-choice) 144

Table 47: Would you consider buying commercial property insurance from a bank or building society? 144

Table 48: If yes, why? (multi-choice) 145

Table 49: Why would you not consider buying commercial property insurance direct from an insurer? (multi-choice) 145

Table 50: Why would you not consider buying commercial property insurance from a bank or building society? (multi-choice) 145

Table 51: What services do you receive from your current commercial property insurance broker? (multi-choice) 146

Table 52: Do you pay extra for these services? 146

Table 53: Overall, how useful are these services? 146

Table 54: What other services would you like to receive? 147

Table 55: What business sector are you involved in? 152

Table 56: How would you best describe your principal property environment? (multi-choice) 153

Table 57: Methodology for Datamonitor�s property premium income splits 156

LIST OF FIGURES

Figure 1: Commercial property insurance GWP grew strongly between 2001 and 2003 26

Figure 2: The commercial property underwriting result was even more profitable in 2003 27

Figure 3: The underwriting ratio has been profitable since 2001 29

Figure 4: Overall claims costs dropped in 2003 due to a lower bill for weather and fire claims 31

Figure 5: The total number of commercial fires increased marginally in 2003 33

Figure 6: The retail distribution sector is at the highest risk of fire 35

Figure 7: There was a slight decline in the number and average value of theft claims in 2003 36

Figure 8: Business interruption claims resulting from fire and weather damage are volatile but declined in 2003, mirroring overall claims costs for these perils 38

Figure 9: Newer insurers and established players are causing rates to soften 40

Figure 10: Estimates of future costs of weather insurance claims, �m 44

Figure 11: Multinational brokers dominate the distribution of commercial insurance 47

Figure 12: The direct channel leads the alternative distribution channels 48

Figure 13: Brokers dominate the sale of commercial property insurance to SMEs 58

Figure 14: The vast majority of SMEs are satisfied with their broker 59

Figure 15: Many SMEs have been with their broker for over two years 60

Figure 16: SMEs based their choice of broker largely on price 61

Figure 17: The majority of SMEs switch provider to get a cheaper policy 62

Figure 18: Price is the main reason why a fifth of SMEs are planning to change broker in the next 12 months 63

Figure 19: AXA is the leading SME insurer 64

Figure 20: Over one-third of SMEs saw no premium rate change last year because of tough competition in the commercial property insurance market 65

Figure 21: Over 10 per cent of SMEs saw a decrease in their property premiums at last renewal 66

Figure 22: The majority of SMEs would consider buying direct from an insurance company 67

Figure 23: Direct insurers should focus on price competition as well as stressing the terms of the package and superior service 68

Figure 24: Just under 40 per cent of SMEs would consider buying from a bank or building society 69

Figure 25: Banks and building societies wishing to sell commercial property insurance should focus on price, package and service 70

Figure 26: The main barrier to the direct and bancassurance channels is that many SMEs are happy with their existing relationship 71

Figure 27: Service, prior experience and reputation all matter when SMEs are choosing their commercial property insurance broker 72

Figure 28: Many SMEs are currently not receiving any additional services from their commercial property brokers 74

Figure 29: Most additional services are provided as a standard component of the policy 75

Figure 30: Most SMEs find additional services useful 76

Figure 31: Most SMEs feel they don�t need any other additional services 77

Figure 32: Only three insurers gained market share in 2003 80

Figure 33: Norwich Union is the largest player in the UK commercial property market 81

Figure 34: The market share of the top 10 insurers has declined since 1999 83

Figure 35: All top 10 insurers became more profitable in 2003, largely due to the hard market and benign weather conditions 85

Figure 36: FM Insurance achieved the lowest gross claims ratio in 2003 87

Figure 37: FM Insurance�s gross claims ratio has fallen each year between 1999 and 2003 89

Figure 38: R&SA�s gross claims ratio has dropped each year since 2000 91

Figure 39: New Hampshire�s gross claims ratio dropped sharply between 2001 and 2002 and remained low in 2003 93

Figure 40: Ecclesiastical saw its commercial property GEP grow in 2003, while its claims ratio reduced 95

Figure 41: NIG�s aggressive premium rate growth has not affected the continued decline of its claims ratio 96

Figure 42: AXA�s gross claims ratio dropped below 50 per cent in 2003 98

Figure 43: Allianz�s claims ratio fell sharply in 2003 due to a significant reduction in claims incurred 99

Figure 44: Zurich FS�s claims ratio fell in 2003 as claims incurred dropped, while GEP grew significantly 101

Figure 45: Norwich Union�s claims ratio fell marginally in 2003 102

Figure 46: NFU Mutual�s gross claims ratio dropped sharply in 2003 due to a fall in claims incurred 104

Figure 47: Lloyd�s property GWP grew strongly between 2000 and 2003 105

Figure 48: Datamonitor estimates of premium rate reductions, 2004-6 108

Figure 49: The soft cycle began in 2004 due to competitive pressures and will continue until 2007 109

Figure 50: Commercial property forecast assumptions 111

Figure 51: The profitability of the market will begin to dip in 2005 112

Figure 52: Datamonitor�s SME Insurance Survey involves SMEs from a wide array of business sectors 151

Figure 53: Retail is the most common property environment for respondents to Datamonitor�s SME Insurance Survey 152