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General Insurance Market Assessment 2006
Key Note Publications Ltd, July 2006, Pages: 212
The general insurance industry in the UK has been transformed since 2001, with the concentration of much of the industry into the hands of a very few major international companies. The pressure of squeezed margins, as the costs of claims and expenses mount, has forced companies to rationalise operations, either expanding (such as in the case of Norwich Union [NU] and The Royal Bank of Scotland (RBS) Insurance, or contracting (as Royal & SunAlliance [RSA] has had to). Market conditions in the UK have tempted many to focus on operations abroad, where margins are healthier. However, there has been no lack of small companies and foreign insurers entering the market with low-cost alternatives, and the market has rarely been more competitive. Banks, in particular, have used cheap capital to finance their expansion in this form of insurance, as they broaden their range of products for their existing customers.
The entry of supermarkets and other retail chains, as well as affinity groups, has been supported by the major banks. Banks supply the back-office services at a low cost, while retailers provide the front-end marketing and sales in their stores.
Since the beginning of 2005, the distribution of general insurance has been dominated by the tightening grip of the Financial Services Authority (FSA). This can be seen in the changing statistics of distribution, as brokers consolidate under the strain of providing higher levels of training and monitoring performance. The FSA has taken a stronger stand on behalf of the consumer, and increasingly requires higher standards of documentation and customer service. This means greater transparency concerning the coverage of policies and exclusion clauses. Questions are being raised about the fairness of insurance conditions, as well as the pressures being exerted; for example, by mortgage lenders over home insurance, travel agents over travel insurance, and white-goods retailers over extended guarantees.
The growth of the Internet was forecast to replace brokers and to cut distribution costs. This report examines, in general terms, how far the use of the Internet has penetrated the consumer market, its impact on consumers, and the implications for the industry. The Internet was slow to take off in the mass market, but has been very useful to consumers wanting to cut the cost of searching for an insurance provider. It has led to greater competition in terms of the premiums offered and market power, which has shifted to the consumer. However, it has not replaced the conventional channels of distribution, so has not had the impact on industry costs that was forecast 5 years ago.
On the other hand, consumers frequently rely on insurer reputation in making their choice of company. This reflects the complexity of the industry and the continuing lack of readily available information on the industry and its performance on claims servicing, for example.
Motor insurance has retained its position as the most important general insurance market. This is unsurprising, given that such insurance is compulsory. Competition remains fierce, as it has for the past 5 years, and looking round for the best offer has become an established habit among many consumers. In practice, this tends to drive down premiums for the more astute motorist, and has led to niche providers and to imaginative innovators, principally in the direct market. Motor insurance has been commoditised for many insurers.
House insurance is less dynamic than motor insurance, but the rapid rise in house prices throughout the UK since 1998 has meant that house insurance has become much more important financially. The demise of with-profits endowment insurance has hit the housing insurance market, reducing the credibility and the reputation of many insurers. However, the high values of houses mean that premiums have to rise to reflect the increased value at risk. The astonishing rise in affluence of the UK population, and consumers' keenness to buy furnishings and household goods, has also affected contents insurance. However, customers are not forced to insure their contents (although must insure the building if they have a mortgage), and there is a maximum level of market penetration that has been reached. Only expensive marketing, and innovative sales methods, will increase the market for house contents insurance, for example.
Travel insurance is a growing market, with the increasing affluence of a population that seeks to use discount airlines to buy more expensive holidays further away, and to take more holidays each year. Travel agents still have a significant influence in the market, although their premiums are sometimes considerably higher than those of mainstream insurers. A trend away from the traditional package holiday towards more individualised breaks will reduce the agents' hold, and the growth of annual travel insurance policies indicates a trend. The regulation of travel insurance by the FSA means that the costs to agents of offering insurance have risen.
Health and accident insurance have continued to thrive, despite the growth of investment in the NHS. Employers are no longer as generous with financial support to staff, so marketing is increasingly directed at individuals. Insurance premiums have risen, but the greater variety of policies available — covering only hospital expenses or focusing on specific diseases or conditions, for example — make partial insurance more attractive. Accident-only cover, which can be offered at low cost by insurers, is attractive to the self-employed, or to those who are uncertain about their jobs.
The continuing atmosphere of crisis in the NHS, with hospital-borne infections and media coverage of attempts to restrict the costs of treatments by individual health authorities, continues to panic many families into purchasing health insurance for private care.
General insurers have an important role to play in spreading risk in an uncertain world so that the chances of individuals being seriously affected by disasters and accidents are reduced by the existence of adequate funds to allow them to pick themselves up again financially. This role is rightly monitored so that expensive risks are as adequately covered as cheap ones. For example, the risk of flooding to a homeowner living in a development on the flood plain of a river cannot be entirely borne by the resident if the UK is to provide enough housing for its population in the South East. The Government has a role to play, and the FSA has made a promising start in reconciling the stakeholders of the industry: underwriters, customers and the State.
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