UK Commercial Insurance Distribution 2006

CHAPTER 1 EXECUTIVE SUMMARY 3
The number of enterprises in the UK grew in 2005, driven by increases in sole proprietorships and partnerships 3
Growth in the UK business parc is occcuring at the smallest end of the scale 3
The majority of companies registered in the UK have no employees 3
Commercial insurance is largely distributed through intermediaries, however, there are signs of growth in other channels 3
Brokers still dominate the distribution of commercial lines insurance 3
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
Retention rates were high in commercial lines, with very few companies changing insurance broker between 2005 and 2006 4
Retention levels are generally high, though SMEs were less loyal to their provider than larger companies between 2005 and 2006 4
Most companies switched from one multinational to another, though multinationals also won business from national brokers and lost business to smaller intermediaries 5
Most of the clients that switched between 2005 and 2006 moved between multinational brokers 5
The top 10 brokers account for the vast majority of client turnover with multinational brokers having the highest market share of larger clients 5
The top 10 brokers accounted for 95.8 per cent of client turnover in 2006 5
Multinational brokers are most successful among companies with high turnovers 6
20 companies in Datamonitor's Insurance Broker Database arranged their insurance in-house 6
Intermediaries will continue to be the dominant distribution channel, while other channels will grow marginally 6
The intermediary channel will retain its dominance in the commercial insurance sector 6
The direct channel will see marginal growth 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
Profits slipped in the UK general insurance market in 2005, as soft market conditions took their toll on most lines of business 25
Soft market conditions were evident in many lines of business in 2005 25
The motor market led the decline with a reduction of 1.5 per cent 25
Property and accident and health also went into decline 25
Liability and pecuniary loss continued to improve 26
The commercial market suffered more than the personal market in 2005 27
Commercial property and commercial motor led the commercial GWP contraction 27
Please note, changes to FSA Returns mean that it is now possible to estimate the commercial pecuniary loss market size. Please see the Appendix for details. 29
The number of enterprises in the UK grew in 2005, driven by increases in sole proprietorships and partnerships 30
Growth in the UK business parc is occcuring at the smallest end of the scale 30
The majority of companies registered in the UK have no employees 31
CHAPTER 4 DISTRIBUTION DYNAMICS 34
Introduction 34
Commercial insurance is largely distributed through intermediaries, however, there are signs of growth in other channels 34
Brokers still dominate the distribution of commercial lines insurance 34
Independent intermediaries are still the major distribution channel within commercial lines insurance 34
Direct insurers hold a relatively small share of the commercial market, however, growth is expected to pick up in terms of policy numbers 34
Direct insurers hold a small share of the commercial insurance market 34
Insurers are expecting to see growth in the direct channel 35
The growth of the direct channel will be limited by low average premium spends and buying behaviour 35
Banks and building societies remain small players in the commercial insurance market 36
There is potential for retailers and affinity groups to grow their market share, however, this is limited by the need for advice 37
imarket makes interactions between insurers and brokers more efficient and further progress is expected in the coming years 39
imarket is an internet portal for brokers that allows multiple quotes to be generated from one application form 39
imarket added two new carriers in 2005 and 2006 40
Further integration with software houses would benefit imarket 40
Broker networks are a popular model and membership looks set to grow further whilst the main threat to smaller brokers is the nationals 41
Survey respondents view national brokers as the biggest threat to their business 41
Over 30 per cent of respondents are part of a broker network 42
Over 10 per cent of respondents said that they may join a broker network in the next 12 to 18 months 43
Many brokers are enticed into a network by the prospect of a larger panel of underwriters 44
Nearly a quarter of brokers have acquired another broker in the last 12-18 months and this trend looks set to continue 45
Nearly 25 per cent of respondents have acquired another broker in the last 12-18 months 45
Broker consolidation looks set to continue with 41 per cent of brokers saying that they are looking to acquire other brokers in the next 12-18 months 46
Brokers have ambitions to grow in a region 47
CHAPTER 5 CUSTOMER FOCUS 49
Introduction 49
Retention rates were high in commercial lines, with very few companies changing insurance broker between 2005 and 2006 49
Retention levels are generally high, though SMEs were less loyal to their provider than larger companies between 2005 and 2006 49
Most companies switched from one multinational to another, though multinationals also won business from national brokers and lost business to smaller intermediaries 51
Most of the clients that switched between 2005 and 2006 moved between multinational brokers 51
Many switchers changed from a national broker to a multinational broker 51
Multinational brokers lost some clients to smaller rivals 51
Willis outshined its large rivals in 2005 and 2006 in terms of customer acquisition and retention while Aon lost the most clients to rival multinational brokers 53
Willis performed better than the other multinationals in terms of customer acquisition and retention 53
Aon lost the largest number of clients to the other multinational brokers between 2005 and 2006 56
Among SMEs retention rates and satisfaction levels are high 58
SMEs are satisfied with their brokers 58
As a result, retention levels are high 60
Most SMEs are not looking to switch provider, as a result of satisfaction with their existing relationships 60
However, some SMEs are potential switchers in search of a better price 61
Around 20 per cent of SMEs have switched provider in the last two years 61
Around 15 per cent of SMEs are planning to change provider in the next year, in the hope of finding a better price 65
SMEs are more likely to plan to switch providers in a hard market 66
Brokers are the first choice for SMEs, however, when prompted, some are willing to consider alternative distribution channels 67
Brokers would be the first choice for SMEs if they were to switch provider 67
More than 50 per cent of SMEs would consider buying direct 68
SMEs' attitudes to buying insurance online supports the potential for direct selling 70
Norwich Union and AXA are the insurers most likely to be approached for alternative quotes 71
A slightly smaller proportion of SMEs would consider buying from banks or building societies 73
The SMEs that would consider alternative distribution channels hope for a better price 75
The SMEs that are willing to buy direct, or through banks and building societies, would be attracted by a better price 75
The SMEs that will not consider alternative distribution channels have concerns about these channels 77
SMEs worry that they will not be able to get a good deal if they buy direct from insurers 77
SMEs worry that banks charge higher rates and lack the specialist expertise they require 78
CHAPTER 6 COMPETITIVE DYNAMICS 80
Introduction 80
The fragmented nature of the broker market, the age profile of many principals, venture capital and more recently FSA regulation have combined to create the consolidation in the broking sector 80
The broker market is fragmented 80
Venture capitalists and investors see strong commercial opportunity in consolidating a number of brokers 80
Many principals are nearing retirement age 81
The costs and administration requirements of FSA regulation have provided a further driver for consolidation 81
A small number of major consolidators exist, with Towergate being the largest with its dual approach to acquisition 82
There are a small number of broker consolidators 82
There are two prongs to Towergate's acquisition strategy 82
2006 saw a number of underwriting agency start-ups 83
Start-up ABC Insurance was bought by Liverpool Victoria 83
M4 Underwriting started writing business in June 2006 backed by Allianz 84
Capital Protection Underwriting was formed in July 2006 84
I-prism ran a pilot in 2006 and is set to launch fully in January 2007 85
Underwriting agency Arista was formed in August 2006 85
The top 10 brokers account for the vast majority of client turnover with multinational brokers having the highest market share of larger clients 85
The top 10 brokers accounted for 95.8 per cent of client turnover in 2006 85
Multinational brokers are most successful among companies with high turnovers 87
20 companies in Datamonitor's Insurance Broker Database arranged their insurance in-house 88
The Spitzer enquiry into contingent commissions has led to major change at the big four brokers 90
The Spitzer enquiry has led to major change among the big four brokers 90
Contingent commissions were paid to brokers in return for a target level of business 90
Aon was the UK's number one broker in 2006 despite turbulence at the firm 90
Aon was the UK's largest broker in 2006 90
Aon has implemented a large scale restructuring initiative 91
Marsh is the UK's second largest broker and has also undergone significant restructuring 92
Marsh was the UK's second largest broker in 2006 92
Marsh introduced a new business model for its brokerage business and has undergone a large scale restructuring 92
Willis held a 21.2 per cent market share of client turnover in 2006 and aims to grow revenue by over �27 million per year up to 2011 93
Willis held a 21.2 per cent market share of client turnover in 2006 93
Willis intends to grow its UK revenues by �27 million per year between 2006 and 2011 93
Jardine Lloyd Thompson is the UK's fourth largest broker and was close to buying fellow broker Heath Lambert in 2006 94
Jardine Lloyd Thompson's is the UK's fourth largest broker 94
Jardine Lloyd Thompson was close to acquiring Heath Lambert in 2006 95
CHAPTER 7 THE FUTURE DECODED 96
Introduction 96
Consolidation will continue, driven by small and large brokers, while the large consolidators themselves may be targeted by insurers 96
Consolidation will continue, driven by small and larger brokers alike 96
Large insurance companies may continue to buy into consolidators in order to increase their market share in commercial lines 97
Use of imarket is likely to increase and broker networks are set to continue their growth 98
Use of imarket will increase as more carriers get on board and the tool becomes more effective 98
imarket will grow as more carriers join the system 98
Further developments by broker softare houses will benefit imarket 98
Broker Networks will continue their growth 99
Intermediaries will continue to be the dominant distribution channel, while other channels will grow marginally 99
The intermediary channel will retain its dominance in the commercial insurance sector 99
The direct channel will see marginal growth 100
Affinities will continue to see their market share creep up slowly 100
Banks and building societies will see their share of the commercial insurance market grow incrementally as the large banks focus on this area 100
CHAPTER 8 APPENDIX 103
Definitions 103
SME 103
Definitions of ABI terms 103
Brokers 103
National brokers 103
Other intermediaries & brokers 103
Chain brokers & telebrokers 104
Direct 104
Other company agents 104
Utilities/retailers/affinity groups 104
Company staff 104
Banks/building societies 104
Written premiums 104
Research methodology 105
Datamonitor's Insurance Broker Database 105
Datamonitor's Commercial Broker Survey 107
Datamonitor's SME Survey 107
Datamonitor's SME Insurance Survey Q3 2005 107
Datamonitor's SME Insurance Survey Q1 2006 107
Current readings 108
Future readings 109
Do you need more information? 109
Datamonitor Financial Services Consulting 109
SPP writing team 111
List of Tables
Table 1: Total general insurance GWP by line of business, 2001-5 27
Table 2: Commercial general insurance market GWP and year-on-year growth, split by sector 2001-5 29
Table 3: Number of enterprises, employees and turnover by size of enterprise, 2005 33
Table 4: Market share of distribution channels in the commercial general insurance market, 2002-5 39
Table 5: Percentage of companies that changed broker between 2005-6, by company turnover band 50
Table 6: Switching of commercial clients between broker segments, 2005-6 53
Table 7: Acquisition and attrition performance of top four brokers, 2005-6 54
Table 8: Customer retention within Aon, 2005-6 55
Table 9: Customer retention within Marsh, 2005-6 55
Table 10: Customer retention within Willis, 2005-6 56
Table 11: Customer retention within Jardine Lloyd Thompson, 2005-6 56
Table 12: Top 10 brokers by client aggregate turnover, 2005-6 86
Table 13: Market share of multinational brokers by client size, 2006 88
Table 14: UK companies arranging insurance in-house, 2006 89
Table 15: Premium turnover of major consolidators and projected growth to 2010f 97
Table 16: Forecast market share of distribution channels in the commercial general insurance market, 2003-10f 102
Table 17: Crawford's Directory industry sectors 106
Table 18: What business sector are you involved in? 107
List of Figures
Figure 1: Soft market conditions were evident in many lines in 2005 26
Figure 2: Commercial motor and property saw declines in GWP in 2005 28
Figure 3: The number of enterprises rose by 1.4 per cent in 2005 30
Figure 4: Small businesses make up the majority of all UK businesses by number 32
Figure 5: National brokers dominate the distribution of commercial insurance 38
Figure 6: imarket generates a number of quotes, while the user only has to input the risk details once 40
Figure 7: National brokers are seen as a significant threat 42
Figure 8: Nearly 32 per cent of respondents are part of a broker network 43
Figure 9: Nearly 13 per cent of respondents say that they might join a broker network in the next 12-18 months 44
Figure 10: Many brokers have joined a network to access a larger panel of underwriters 45
Figure 11: Growth through acquisition remains an attractive strategy to commercial brokers 46
Figure 12: Over 40 per cent of brokers are considering acquiring a fellow broker in the next 12-18 months 47
Figure 13: Many brokers are planning to acquire other brokers in order to grow in a certain region 48
Figure 14: Companies with a turnover below �20 million were most promiscuous between 2005 and 2006 50
Figure 15: Most customer switching occurs from multinational brokers to other multinational brokers 52
Figure 16: Jardine Lloyd Thompson had the highest rate of client acquisition between 2005 and 2006 54
Figure 17: A number of clients moved within multinational brokers between 2005 and 2006 58
Figure 18: SMEs are largely satisfied with their commercial property broker 59
Figure 19: SMEs are also happy with their commercial liability broker 59
Figure 20: 43 per cent of SMEs have been with their insurance provider for more than 5 years 60
Figure 21: Most SMEs are not planning to change their insurance broker 61
Figure 22: Of the minority that have been with their commercial property broker for less than two years, most SMEs mention price as their reason for switching 63
Figure 23: The minority of SMEs that have been with their commercial liability broker for less than two years also mention price as their main reason for switching 64
Figure 24: 85 per cent of SMEs plan to stay loyal to their broker in the next 12 months 65
Figure 25: Fewer SMEs were planning to change their commercial property broker at the beginning of 2006 than in 2005 66
Figure 26: Fewer SMEs were also planning to change their commercial liability broker at the beginning of 2006 than in 2005 67
Figure 27: Most SMEs would approach another broker if looking to change their provider 68
Figure 28: 73 per cent of SMEs would consider buying insurance direct 69
Figure 29: Just under 50 per cent of SMEs would consider buying commercial property insurance direct 69
Figure 30: Just under 50 per cent of SMEs would consider buying commercial liability insurance direct 70
Figure 31: A significant proportion of SMEs would consider buying insurance online 71
Figure 32: Norwich Union is mentioned by the highest number of SMEs as the insurer they would approach for an alternative quote 72
Figure 33: Norwich Union is also the insurer that most SMEs mention when asked who provides direct commercial insurance 73
Figure 34: 55 per cent of SMEs would consider buying commercial insurance from banks or building societies 74
Figure 35: 36 per cent of SMEs would consider buying commercial property insurance from a bank or building society 74
Figure 36: 38 per cent of SMEs would consider buying commercial liability insurance from a bank or building society 75
Figure 37: Many SMEs would consider buying direct if they could get a cheaper and better deal 76
Figure 38: The main reason given by SMEs for considering buying from a bank or building society is price 77
Figure 39: 27 per cent of SMEs will not consider buying direct because they are happy with their current provider and think that a broker will get them a better deal 78
Figure 40: The main reason why 45 per cent of SMEs would not consider banks for their commercial insurance, is that they think banks are more expensive 79
Figure 41: A number of factors are driving consolidation in the broker market 82
Figure 42: Aon led the market in 2006 in terms of its share of client turnover 86
Figure 43: Multinational brokers account for over 80 per cent of clients with turnovers of over �1 billion 87
Figure 44: Aon was the number one UK broker in 2006 with a 28.4 per cent share of client turnover 91
Figure 45: Marsh was the second largest UK broker in 2006 93
Figure 46: Willis intends to grow its revenue by �27 million per year 94
Figure 47: Jardine Lloyd Thompson is the UK's fourth largest broker in terms of client turnover 95
Figure 48: Commercial insurance will continue to be dominated by the intermediary channel between 2006 and 2010 101
Figure 49: The SMEs surveyed in Q1 2006 come from a variety of business sectors, though most are involved in retail 108