UK Commercial Property Insurance 2007

CHAPTER 1 EXECUTIVE SUMMARY 3
The commercial property market suffered in 2006, continuing the trend from 2005 3
Commercial property GWP declined to �4.9 billion in 2006 3
The commercial property underwriting result fell by 38.6 per cent in 2005 3
Commercial property claims fell in 2006 as costs resulting from fire, business interruption and weather damage all declined 3
The industry remains concerned about future losses related to fire and flood as recent changes have heightened uncertainty in both 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 5
In 2005, nine of the top 10 commercial property insurers increased market share, as the market became more consolidated 5
Most top 10 commercial property insurers increased market share in 2005 5
The top 10 commercial property insurers experienced mixed results with their ratios in 2005, with St. Paul experiencing the lowest combined ratio 6
Premium rates fell in the SME sector while a number of new underwriting agencies are targeting this marke 6
Broker networks and consolidation among brokers continued to proliferate, while large insurers have bought into the distribution chain 7
The commercial property insurance market experiences strong price competition, and moves into an underwriting loss in 2007 7
Datamonitor forecasts that the commercial property insurance market will reach �5.5 billion in GWP by 2011 7
CHAPTER 2 INTRODUCTION 11
What is this report about? 11
Who is the target reader? 11
How to use this report 12
CHAPTER 3 MARKET CONTEXT 13
Introduction 13
The commercial property market suffered in 2006, continuing the trend from 2005 13
Premium income fell by 6.9 per cent in 2006 13
The commercial property underwriting result fell by 38.6 per cent in 2005 14
Commercial property insurance performance ratios deteriorated in 2005 16
The claims ratio increased after a long run of improvements 16
The expense ratio increased by 4.1 percentage points in 2005 16
The underwriting ratio also deteriorated in 2005 as both the claims and expense ratios increased 16
Commercial property claims fell in 2006 18
Commercial property claims costs resulting from fire, business interruption and weather damage all fell in 2006 18
Commercial fire numbers fell in 2005 19
Weather claims costs declined in 2006 21
Business interruption claims costs, following fire and weather damage, fell in 2006 22
Theft claims costs increased due to higher average claim values in 2006 23
The industry remains concerned about future losses related to fire and flood as recent changes have heightened uncertainty in both 25
A fireworks blaze ended an otherwise quiet year for fire related property claims 25
The future state of Britain's flood defences have become a source of concern for insurers due to recent policy changes 26
Future risks are also seen as becoming more unpredictable as climate change alters rain and storm patterns 26
Fire regulation changes that came into effect in Oct 2006 also decrease the ability of insurers to gauge risk accurately 27
Total losses have increased, with insurers noticing more large fire losses in 2006 28
CHAPTER 4 DISTRIBUTION 29
Introduction 29
Commercial insurance is largely distributed through intermediaries, however, there are signs of growth in other channels 29
Brokers still dominate the distribution of commercial lines insurance 29
Independent intermediaries are still the major distribution channel within commercial lines insurance 29
Direct insurers hold a relatively small share of the commercial market, however, growth is expected to pick up in terms of policy numbers 29
Direct insurers hold a small share of the commercial insurance market 29
Insurers are expecting to see growth in the direct channel 30
The growth of the direct channel will be limited by low average premium spends and buying behaviour 30
Banks and building societies remain small players in the commercial insurance market 31
There is potential for retailers and affinity groups to grow their market share, however, this is limited by the need for advice 32
imarket makes interactions between insurers and brokers more efficient and further progress is expected in the coming years 34
imarket is an internet portal for brokers that allows multiple quotes to be generated from one application form 34
imarket added two new carriers in 2005 and 2006 35
Further integration with software houses would benefit imarket 35
CHAPTER 5 COMPETITIVE DYNAMICS 37
Introduction 37
In 2005, nine of the top 10 commercial property insurers increased market share, as the market became more consolidated 37
Most top 10 commercial property insurers increased market share in 2005 37
Royal & SunAlliance gained the most commercial property market share in 2005 37
NIG increased premium income and market share 37
Ecclesiastical moved up the commercial property rankings in 2005 38
Allianz maintained its position despite an increase in premium income 38
Market leader Norwich Union continued to grow its commercial property insurance market share 38
St. Paul joined the top 10 commercial property insurers for the first time in 2005 38
Zurich increased its market share marginally 39
FM Insurance recovered market share in 2005 39
AXA retained its fourth place ranking 39
The commercial property market grew increasingly consolidated in 2005, while Lloyd's and other non-ABI companies increased their share 42
The top 10 commercial market insurers gained market share at the expense of players outside the top 20 42
Lloyd's and other non-ABI companies accounted for an increasing share of the property insurance market in 2005 44
The top 10 commercial property insurers experienced mixed results with their ratios in 2005, with St. Paul experiencing the lowest combined ratio 46
All top 10 commercial property insurers remain profitable even as soft market conditions have impacted combined ratios 46
Premium rates fell in the SME sector while a number of new underwriting agencies are targeting this market 49
Falling premium rates continued in 2006 as competitive pressures moved into SME lines 49
Three significant new start-up underwriting agencies entered the commercial insurance market in 2006, targeting the SME sector 49
Start-up ABC Insurance was bought by Liverpool Victoria 49
M4 Underwriting started writing business in June 2006, backed by Allianz 50
Start-up Arista Insurance will also target the SME market 50
Broker networks and consolidation among brokers continued to proliferate, while large insurers have bought into the distribution chain 50
Broker networks and consolidators stepped up activity in 2006 50
Insurers have sought to safeguard access to the market through broker acquisitions 51
CHAPTER 6 THE FUTURE DECODED 52
Introduction 52
The commercial property insurance market experiences strong price competition, and moves into an underwriting loss in 2007 52
The commercial property insurance market is experiencing intense competition 52
Datamonitor forecasts that the commercial property insurance market will reach �5.5 billion in GWP by 2011 54
The commercial property insurance market is forecast to move into an underwriting loss in 2007 56
In the optimistic scenario, the UK commercial property insurance market is forecast to reach �5.7 billion in GWP by 2011 if price competition is muted 58
The commercial property insurance market experiences intense competition in 2006 58
Commercial property insurance GWP dips in 2007, followed by increases between 2008 and 2011 59
In the optimistic scenario, the commercial property insurance market regains profitiability in 2009 61
In the pessimistic scenario, strong rate cutting in 2007 leads the commercial property insurance market to record stronger losses 63
The commercial property insurance market experiences intense competition in 2006 and in 2007 63
The commercial property insurance market sees a strong contraction in 2007 followed by a period of growth between 2008 and 2011 64
Underwriting losses peak at �254 million in 2008 66
CHAPTER 7 APPENDIX 69
Definitions of ABI terms 69
Brokers 69
National brokers 69
Other intermediaries & brokers 69
Chain brokers & telebrokers 69
Direct 69
Other company agents 69
Utilities/retailers/affinity groups 70
Company staff 70
Banks/building societies 70
Written premiums 70
Supplementary data 71
Methodology 71
FSA Return changes 71
Total commercial property 71
Pre-2005 definitions for lines of business 72
Property 72
Current readings 73
Future readings 73
Do you need more information? 73
Datamonitor Financial Services Consulting 73
SPP writing team 75
List of Tables
Table 1: Commercial property insurance GWP, 2001-2006e 14
Table 2: Commercial property insurance underwriting account, 2001-5 16
Table 3: Commercial property insurance claims, expense and underwriting ratios, 2001-5 17
Table 4: Gross incurred commercial property claims by peril, 2002-6 19
Table 5: Number of UK fires, by location, 2001-5 21
Table 6: Commercial property insurance weather claims costs, 2002-6 22
Table 7: Cost of business interruption claims by cause, 2002-6 23
Table 8: Total cost of commercial property insurance theft claims, 2002-6 24
Table 9: Number of commercial property theft claims, 2002-6 25
Table 10: Average value of commercial property theft claims, 2002-6 25
Table 11: Market share of distribution channels in the commercial general insurance market, 2002-5 34
Table 12: Market share of the top 10 commercial property insurers, 2001-5 42
Table 13: Market share of the top 10 commercial property insurers compared with those ranked 11-20 and those outside the top 20, 2001-5 44
Table 14: Property GWP split between ABI members and Lloyd's / Other, 1995-2005 46
Table 15: Combined ratios of the 10 largest commercial property insurers, 2005 48
Table 16: Neutral scenario: Forecast GWP for the commercial property insurance market, 2001-11f 56
Table 17: Neutral scenario: Forecast underwriting result for the commercial property insurance market, 2001-11f 58
Table 18: Optimistic scenario: Forecast GWP for the commercial property insurance market, 2001-11f 61
Table 19: Optimistic scenario: Forecast underwriting result for the commercial property insurance market, 2001-11f 63
Table 20: Pessimistic scenario: Forecast GWP for the commercial property insurance market, 2001-11f 66
Table 21: Pessimistic scenario: Forecast underwriting result for the commercial property insurance market, 2001-11f 68
Table 22: Top ten commercial property insures by premium income, 2001-5 71
List of Figures
Figure 1: The top 10 insurers increased their share of the commercial property market in 2005 at the expense of insurers outside of the top 20 6
Figure 2: Commercial property insurance GWP contracted in 2005 and 2006 14
Figure 3: The commercial property insurance underwriting result fell by over a third in 2005 15
Figure 4: Commercial property insurance claims and underwriting ratios both deteriorated in 2005 17
Figure 5: Fire, business interruption and weather claims costs relating to commercial property insurance fell in 2006 19
Figure 6: The number of commercial property fires fell in 2005 20
Figure 7: The cost of commercial property weather claims declined in 2006 22
Figure 8: Business interruption claims costs fell in 2006 following the lack of weather events 23
Figure 9: 2006 saw a drop in the number of commercial property theft claims but an increase in the average value of each claim 24
Figure 10: A fire decimated a fireworks factory in East Sussex in 2006 26
Figure 11: National brokers dominate the distribution of commercial insurance 33
Figure 12: imarket generates a number of quotes, while the user only has to input the risk details once 35
Figure 13: Norwich Union was the largest commercial property insurer in 2005 with a market share of 18.4 per cent 40
Figure 14: Royal & SunAlliance gained 4 per cent of the UK commercial property insurance market in 2005 41
Figure 15: The top 10 insurers increased their share of the commercial property market in 2005 at the expense of insurers outside of the top 20 43
Figure 16: The vast majority of property business remains with ABI companies but the amount written outside the company market has grown 45
Figure 17: All top 10 commercial property insurers were profitable in 2005 48
Figure 18: Key to the relative importance of forecast variables 52
Figure 19: Neutral scenario key variables affecting commercial property GWP, 2006e-11f 54
Figure 20: Neutral scenario: commercial property insurance GWP declines in 2007 before increasing between 2008 and 2011 55
Figure 21: The commercial property insurance market is forecast to move into an underwriting loss in 2007 with losses peaking in that year at �111 million 57
Figure 22: Optimistic scenario: key variables affecting commercial property GWP, 2006e-11f 59
Figure 23: Commercial property insurance GWP reaches �5.7 billion in GWP by 2011 60
Figure 24: The commercial property insurance market moves into an underwriting loss in 2007 before recovering profitability in 2008 62
Figure 25: Pessimistic scenario: key variables affecting commercial property GWP, 2006e-11f 64
Figure 26: Commercial property insurance GWP reaches �5.5 billion in 2011 65
Figure 27: The commercial property insurance market is forecast to move into a loss in 2007 and for losses to peak at �254 million in 2008 67