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Personal Lines Insurance Market Assessment
Key Note Publications Ltd, Jan 2000
We will be trying to assess which segments of the market have the brightest prospects, and which companies appear best placed to prosper in the next five years. Times are not easy. Direct sellers continue to force down margins in general insurance. Adverse publicity from pension mis-selling, and now from poor bonuses on endowment policies, are negative factors in long term insurance. All companies in the insurance market now have to master the challenges of electronic and mobile commerce, as well as the marketing barriers resulting from the very nature of insurance, which requires customers to contemplate future events which may be extremely unpleasant.
At the time of writing this report (February 2000), the CGU and Norwich Union had announced a £19bn merger, creating a British-based insurer large enough to compete in the rapidly changing European market.
The new group will be known as Cgnu and will be the UK's largest provider of general insurance, covering home, business and motor - and second in life and pensions only to Prudential.
Definition
Personal lines insurance refers to products taken out by or for an individual, in a private capacity. The two main sectors are:
General insurance, involving annual re-insurance of specific risks. The current value of net premium income for general insurance in the UK is around £18.9bn.
Long term insurance, involving a contract between insurer and insured which is intended to last for a substantial time. Individual long term insurance and pensions policies of all types in the UK bring in annual premium income of around £54.7bn.
The four main categories of personal general insurance are motor, property, accident and health, and pecuniary loss. Risks covered by long term insurance include untimely death (via life insurance), a prolonged life (via annuity contracts), and loss of earnings (via income protection policies). Also included in this category are personal pension schemes.
Strategic Overview
Big Insurers
The five largest insurers in the UK are now likely to account for more than 40% of national annual premium income. The largest insurers based in the UK are CGU, Prudential Group, Royal and Sun Alliance, AXA Group and Norwich Union. These five transact both long term and general business, although Prudential only has a toe-hold in the general market. As this report was completed, Norwich Union and CGU surprised the market by announcing a merger to create a £20 billion group, the fourth largest in Europe after AXA (France), Allianz (Germany) and Generali (Italy). ZFS (Zurich Financial Services) also has a significant and growing role in both sectors, through its acquisitions including Allied Dunbar and Eagle Star.
Within the personal sector in the UK, long term insurance accounts for around 75% of the market and general insurance around 25%. Long term insurance has been increasing its share, up from less than 70% in 1995. The insurance industry is the second largest, after banking services, in terms of overseas earnings.
Only the largest insurers have a strong presence in the long term and general sectors. CGU is the largest insurer with substantial business in both camps. Royal and Sun Alliance, Norwich Union, AXA and ZFS are also major forces in both long term and general insurance, and have significant international business. The planned Cgu-norwich Union merger will bring added scale to the group's general and long-term business. The largest long term insurers by net premium income from the UK are headed by the Prudential, Barclays Life and Standard Life.
Insurance companies are operating in a UK economy which is doing well, although exports to the Euro zone have been hit by the weakness of the Euro against the pound, which at times has appreciated by over 15% against the Euro.
Pensions Mis-Selling and Other Misfortunes
Both CGU and Prudential received net premium income exceeding £10bn in 1998. After a dip in profitability in the mid-1990s, the life sector is performing better and reserves are rising. At the same time, bonuses paid to policy holders are falling. Companies tend to attribute this to low interest rates and low inflation. The paradox in this argument is the fact that equities generally perform better when interest rates are low - companies can grow at lower cost - and thus if the investments are mainly in equities, returns to investors should Rise. The invisibility of investments in endowments and pensions is a great advantage for companies, because policy holders have to accept the company's line on performance. The bill for mis-selling pensions, likely to be around £12bn, is huge: equivalent to 14% of UK companies' total net worldwide life premium income in 1998, and approaching double the pensions premiums received in 1998. Companies are also concerned about maximum charges on Cat-standard ISAs, and on stakeholder pensions, and feel a real need to expand their free reserves. The reserves of the UK's general insurance companies exceeded £39bn by the end of 1998.
Take-Up of Insurances
In 1997/1998, the average UK household spent £1,220 on all types of insurance, including personal pensions, according to figures from the Association of British Insurers, released in December 1999. This equated to about £30bn for the UK as a whole. This is less than half the £68.99bn total for all personal long term and general insurance in 1998, pointing to the considerable role of employers in funding personal insurances.
The following year, 1998/1999, the average UK household spent £1,107.60 on insurances and pensions. The apparent fall in household spending on insurance in 1998/1999 is probably partly a result of the composition of the sample. It is also likely to reflect growing reluctance to purchase endowments, and nervousness about saving in personal pensions, because of the requirement to purchase an annuity when the policy holder has retired.
In 1998, a much smaller percentage of UK households paid for life insurance than in 1980, a further indication of the expanding role of employers in funding insurance for their staff.
The end of the 1990s saw a big rise in single-premium life policies, but pensions have not been growing as fast as they should, in the light of continued State withdrawal from welfare spending. Total premiums paid for personal pensions in 1998, averaged over all people between 16 and 59 (women) and 64 (men), were equivalent to £471 per adult, on the basis of total premiums of £17.145bn and a population of 36.39 million. Allowing for around 27% of adults contributing to a personal pension (NOP research for Market Assessment in 1999), the average for each is about £1,750 - not a large sum on which to base future prosperity. In addition, National Opinion Poll (NOP) Solutions found that about 42% of working adults are contributing to a company pension. The 30%+ of working adults who are not contributing to any form of pension are the main reason for the coming introduction of stakeholder pensions. In addition, around 42% of adults are contributing to a company pension.
Annuity purchases have slumped because their value is geared to interest rates, which halved during the 1990s. There is moderate growth in income protection insurance, which enables people to replace income if they can no longer work for medical reasons. Premium income has been rising at a far faster rate than the number of policies, as those with heavy outgoings insure themselves for greater amounts of income replacement. In 1998, there was only one income protection policy for every 18 households.
Property is partly to blame. In 1998, the rise in property prices handed a lot of paper equity to mortgage-payers, making them feel richer, and encouraging many to release this equity, or to regard it as a pot which can be dipped into in emergencies, and thus an alternative to long term insurance policies.
The ageing population is a major opportunity for long term care insurance. This is still an embryonic sector. By the end of 1997, there were fewer than 23,000 policies in force in the UK. Those contemplating their old age are the most likely buyers. Under-50s account for only 2% of policies.
Latest figures published by the Association of British Insurers for 1998, show that total UK premiums paid for life and pensions premiums, including occupational schemes, were about £72.4bn. During the year, life and pensions policyholders received £55bn. Policyholders own just on a quarter of all UK shares, valued (at the end of 1998) at £299bn. Direct sales remain of marginal significance in long term insurance. In 1994, direct sales of pensions accounted for 3% of new regular premiums, up from 2% in 1990, but the share has since stuck at 3%. Direct sellers have an even smaller share of single-premium business, no more than 2% and probably nearer 1.5%.
The government intended to boost long term insurance through Individual Savings Accounts (ISAs). An insurance ISA enables investors to put up to £1,000 a year - £10,000 over the guaranteed 10-year life - into life assurance. The Charges, Access and Terms (CAT) standard requires investors to at least get their premiums back after three years. This will be expensive for providers, even if they levy the maximum 3% annual charge permitted for a Cat-standard ISA. In their first quarter on sale, only 45,000 investors selected an ISA with an insurance element. The average investment was just under £280.
Net premiums for general insurance in the UK in 1998, including liability insurance which is excluded from this report, totalled just over £22bn. General insurance is far simpler than long term, and can be sold by call centre staff without financial expertise or qualifications. Accident and health insurance premiums have risen at a faster rate than motor and property premiums. They are more complex than motor and property policies, and less suited to direct sellers.
By 1995, around 30% of motor insurance was obtained over the telephone from around 50 direct insurers in the market. Direct sellers' share has now risen to around 36%. The motor market remains aggressively competitive, although underwriting results have improved through a decline in the value of claims.
Direct insurers' share of the property insurance market is nearing 20%, up from 12% in 1990. Despite the growth, their share is lower than in motor insurance. The still strong position of mortgage lenders has slowed the advance of direct sellers in property insurance. Two-thirds of all mortgages are sold with an insurance policy.
People in local authority housing do not need buildings insurance, but many would like to insure their contents. However, there is a staggering £20,000 a year difference between average incomes of mortgage holders and those of council and housing association tenants, many of whom would struggle to afford contents insurance. Increases in the number of elderly people (who tend to live alone), increasing divorce rates and the trend towards lower family sizes all contribute to the rise in the number of households, up 54% since 1961. The potential for contents insurance policies is thus still expanding, although the low incomes of many possible customers are a significant drawback.
The market for private medical insurance is concentrated. Five companies have 85% of the market, and fewer than 30 companies are active in the sector. The two leaders, Bupa and PPP, lost share between 1992 and 1997, but Norwich Union and Prime Health (part of the mutual insurer Standard Life) at least doubled theirs. Between 1987 and 1997, insurers' premium income rose one-and-a-half times, while the number of persons covered increased by only 15%. Claims amounted to 80% of premium income in 1987 and 1997, so the insurers have not increased the share they retain. New, expensive medical treatments are largely responsible for the premium increases, and for companies' difficulties in building profits.
Travel insurance is a specialised niche, often sold through intermediaries such as travel agents. The fact that holiday companies generally insist on customers holding insurance - preferably purchased from themselves - puts a strong floor in the market, and enables small brands to thrive. There appear to be opportunities to develop stronger brand identities.
Consumer Dynamics
Market Assessment commissioned NOP to undertake consumer research in 1996 and 2000. There are interesting differences. In 2000, a new question was added, about use of the Internet, which more than four in ten of the under-25s would be happy to use to buy insurance - more than would buy over the telephone!
Other changes since 1996 include:
Greater concern to buy from a company which has shown strong financial performance.
Much more importance attached to the name - the branding - of the company, and to the quality of customer service, especially friendly, personal service.
More regard to the age of the company. This links with a rapidly growing preference for large companies.
Small companies are declining in favour, even if they have excellent products.
Customers are more likely to seek discounts for buying more than one product.
More customers want to do business over the telephone, and 22% overall would like to buy insurance products over the Internet. This rises to 42% of the 16-24 age group.
In 1996, consumers placed the simplicity and ease of understanding of a product marginally above its price, although price remained an important factor. The research showed that loyalty was earned more with service than with price. Demand for telephone services was not high in 1996, and many companies still saw a future for branches.
By 2000, consumers are keener on buying over the phone. Even more significant is the rapid acceptance of the Internet. Another significant change since 1996 is the customers' increased focus on the company, rather than on its products. Dealing with a reliable company with strong financial performance was ranked third in 1996 and top in 2000, cited by 90% of respondents compared with 85%. Customers still want simple, easy to understand products (88% in 2000, 89% in 1996 and they insist on competitive price (89% in 2000, 87% in 1996).
Friendly personal service has advanced in the rankings, up to 86% from 78%. This does not quite gel with the growth in popularity of the telephone and the Internet. It is possible to convey friendliness on the phone, although many companies do not succeed. This is probably due to the pressures placed on staff in call centres, who are too busy trying to fill their quotas to waste much time on pleasantries. The prevalence of formal scripts which staff must follow does not help either.
There is slightly more insistence on dealing with a well-established company, 87% in 2000, compared with 83% previously. This links with the finding that customers want to deal with a well-known company - 80% in 2000, compared with 71% in 1996. Fame acquired in other areas is a big help to newcomers to insurance, such as Tesco and Virgin.
In 1996, 66% of respondents said it would be important to deal with a small company, if it offered excellent products. By 2000, this was down to 55%, reflecting the trend to value company above product. The big rise in customers seeking to deal with a large company, 55% in 2000 compared with only 34% in 1996, indicates that there will possibly be many more take-overs and mergers in the insurance industry.
Branches are more important than home transactions for the 2000 sample, 62% saying branch transactions are important, and 44% wanting all transactions in the home. However, these answers indicate that substantial numbers of people still want face-to-face transactions. There is a bias towards lower socio-economic groups - often those in areas where companies have been most active in closing branches.
The 2000 buyer is fussier about discounts than he was in 1996, 58% wanting to seek discounts for buying more than one product, compared with 51% in 1996. This is probably partly a response to consumer advice and information, and partly due to the realisation that individuals are being forced to take more responsibility for their financial health - which will cost them considerably more over the coming years.
The latest survey indicates that small insurance companies will find life ever tougher. Customers want financially sound, well-established insurance providers, with high-profile brands. Young customers want to use computer technology, and it is quite likely that by 2004, well over half of under 25s will seek companies offering a full Internet service.
Marketing Developments
Top Advertisers
Barclays was the largest advertiser in financial services in 1999, followed by Royal Bank of Scotland and its subsidiaries and associates, including Direct Line Insurance. Scottish Widows, the former mutual life company, was third in the spending league. Scottish Widows is joining the Lloyds TSB group, and if it continues to advertise on the same scale, will take Lloyds TSB to the top of the table, challenging Barclays for the title of biggest advertiser.
Insurance companies are now more prominent among the largest advertisers than they were in 1993 or 1994. Prudential spent over £15m in the year to end of September 1999, but much of this was on its Egg Internet service rather than on insurance and life assurance specifically. Insurance is the biggest category in the RBS Group's advertising expenditure, because of the budget given to Direct Line.
The amount spent on insurance and pensions advertising in the year to end September 1999 was £160.4m, one-fifth of the total for all financial services. The largest category was generic, closely followed by motor insurance, which was the biggest category in the year to June.
Direct Mail
Insurance companies are among the biggest senders of direct mail, followed by credit card companies and banks. Nearly two-thirds of recipients open and read direct mail about insurance, and just over a fifth, 22%, have made a purchase as a result. The sample, questioned in 1998, was composed of people who hold insurance, or who receive direct mail about it, and thus was not representative of the population as a whole. A fully representative sample would almost certainly indicate lower levels of interest in insurance.
Consumers in the sample like direct mail which tells them who to contact if they have a problem this encourages loyalty provided the contact is friendly and efficient! However, nearly four in ten, 38%, are resistant to direct mail and say they would not buy from the companies sending it.
Television (TV) was the most popular medium for creating awareness of insurance companies and products, given by 41%. IFAs were valued for their information by 34% and radio, also has a big information role, cited by 33%. Leaflets were the most popular medium for finding out about price, given by 36%. Direct mail is also used extensively to glean information, once awareness has been created in other ways. For example, 23% used direct mail from insurance companies to find out prices, and 21% did so for direct mail sent out by banks.
Electronic Commerce and Mobile Commerce
Electronic commerce (e-commerce) is the dynamic medium of 2000, a point reinforced by the NOP survey findings for this report. Lloyds TSB, for one, is strengthening its e-commerce operations. Internet transactions cost about 1p each, compared with US$1 or more (61p) for a phone transaction. E-commerce is only one aspect of the Internet, though. It is a sophisticated advertising medium, and a tool of customer relationship management. By July 1999, there were 10.5 million Internet users at home and at work in the UK, according to Durlacher. There has been phenomenal growth from under half a million users in 1992.
Durlacher's 1999 report on domestic Internet use found that 31% of users were nervous of purchasing online for security reasons, but 25% did not buy because of a lack of appropriate vendors!
Internet companies are working with financial companies to offer finance supermarkets, for example Freeserve and Global Net have joined with Cox Insurance Holdings to start a service which enables shoppers to get and compare quotes from AXA, Cornhill, Equity Red Star, Norwich Union, RSA and Zurich. The service started in December 1999 with motor insurance, with household, pet and health insurance due to follow during 2000.
Mobile Internet connections are the next great growth area, suggests Durlacher Research. Europe is about two years ahead of the US in developing the technology for this new sector, mobile commerce (m-commerce). Durlacher expects mobile operators to start seeking banking licences, or acquiring banks, by 2001. From 2002, smartphones using wireless Internet access are likely to become standard. M-commerce across Europe could be worth Euro 23bn by 2003, compared with just Euro 323m in 1998.
Keeping Customers
The business of customer relationship management is growing by around 25% a year. The journal Database Marketing describes how American companies - up to about 5% of them so far - are using computer power to build personalised relationships with customers, as part of their retention strategy.
In the UK, the Halifax's Clerical Medical life and pensions subsidiary uses a customer relationship system to inform its own marketing staff and IFAs. Clerical Medical built a Unix-Oracle database with 1.2 million customer names, and details of 20,000 IFAs. Then `overlays' such as Financial Acorn and Find were added, to indicate each customer's lifestyle and lifestage. Protagona database management and selection software, from Recognition Systems, is used to identify policy holders by type and time held, and to identify potential customers for cross-selling. Protagona is also supporting the development of Clerical Medical's website as a marketing tool.
Technology also underpins the provision of additional benefits when customers buy insurance, which is inherently rather a dull concept. Providers who offer additional benefits have a good marketing platform. Tesco, for example, offers 2,000 Clubcard points with each home insurance policy, which is underwritten by Privilege Insurance. Great Universal gears its insurance to its catalogue customer profile - female, older, with second-hand cars - and offers 10% back in catalogue vouchers. This is a big benefit because of the wide range of goods in the catalogue. In January 2000, customers were invited to enter a draw for a Peugeot 106 car in return for a quote for motor or household insurance. Companies used by Great Universal include CGU, GAN, and Royal and Sun Alliance. Other broad spectrum mail order companies also offer general insurance, often with a wide range of payment options.
Despite the advances in customer relationship marketing, consumers' reluctance to insure and save is still a huge barrier for insurers to cross. At present, one household in every three with children has no life insurance cover at all. The insurance industry is starting to meet the marketing challenge. The Savings and Long term Risk Project is developing quality standards for clarity of information, suitability of product, and level of service. The standards will be up-held and policed by a new independent authority, the Pension, Protection and Investments Accreditation Board (Ppiab). The first quality marked products should be available during 2000. The venture should help customers to buy products with greater confidence than in the past.
The Future
Good Prospects for Hybrid and Fixed-Price Plans
Long term insurance forces people to think about the future, often not a cheery prospect. To help counteract the view of property as a financial safety net, and the future as something to be ignored for as long as possible, companies are developing hybrid insurance and savings plans which give a cash return if there is no claim. These plans are easier to market than policies which pay only if there is a claim, because there is a definite tangible return. This is potentially a very buoyant area, and can help to counteract the adverse effects on insurance of property equity.
Prospects are also promising for the long term care, critical illness and income protection sectors, particularly policies for self-employed professionals. Bupa sees growth in fixed-price medical insurance policies, and launched its first in December 1999. The customer can opt for level premiums for five or 10 years, and thus avoids the unexpected premium increases which damaged the market in the 1990s.
The markets for property and motor insurance will show steady improvements, resulting from a strong economy and continued increase in the number of households.
Problems for Pensions
The pensions market is awaiting the upheaval of stakeholder pensions, to be introduced in 2001. By 2011, some analysts predict that stakeholder pensions are likely to have more than doubled the UK pensions market, from £46bn a year to over £100bn. This would give providers the opportunity to go for scale - which will probably be necessary, because margins will be tight: the maximum annual charge is 1%. Expansion on this scale is probably over-optimistic unless the annuity problem is solved even with tax incentives, people on low to medium incomes will be reluctant to put hard-earned money into an untouchable fund if they have no idea of the size of the pension at the end.
Research by Deutsche Bank, indicates that there will be many losers, probably including United Assurance, Royal and Sun Alliance and Britannic. The week this report was completed, the mutual Royal London announced it was acquiring United for £1.5 billion. United was itself the product of the 1996 merger between Refuge Assurance and United Friendly. Britannic had been seeking to buy United - a deal which would have given it much-needed scale - but has been disappointed. Companies which could do well, long term, in pensions include Legal and General, Norwich Union and AXA's Sun Life and Provincial. Prudential and CGU have the scale to weather early difficulties. The proposed merger between CGU and Norwich Union would bring economies of scale to two companies which already have sound prospects. The gap between the leading pensions providers and the rest is almost certain to grow wider, resulting in a spate of mergers and take-overs.
Higher Profile for Customer Relationship Management
Negative factors such as bad publicity from pensions mis-selling, and cutting endowment bonuses, mean that customer relationships will be of growing importance for insurance companies. As they form strategic alliances with an increasing number of third parties, greater care will be required in managing the partnership. Customers who make close associations with two or more partnered organisations are likely to abandon them all if just one fails to provide good service. There is also the risk that brand values will be diluted within partnerships, or that one brand will become completely dominant.
Exceptional levels of service may no longer be enough to keep customers, because of competition from tangible benefits such as vouchers and discounts, offered by diversified companies or by specialist companies working in partnership with those in other markets.
Some companies will seek to confine the most useful financial information to its own long term customers. This could help them to offer a club-like service, offering a sense of membership and inclusivity.
The most profitable consumers have enormous power. They have access to quantities of information undreamed of even 10 years ago. Increasingly they choose suppliers, rather than being passive marketing targets. They are not likely to accept that fund managers have vastly superior financial expertise and in long term insurance they will demand the facility to track their individual investments. Transparency will become a key marketing point in the first years of the new century.
NOP's research for this report shows customers want to do business with reliable companies achieving strong financial performance. Overall, the company is more significant than its products, and this favours the insurers and bancassurers with the strongest corporate brands. The Internet is still a way in for smaller companies, but not for long. Once the Internet is a mass medium, customers using it are likely to seek suppliers of proven reliability. E-commerce, to be joined by m-commerce, is a great enabler for international financial services, but needs to be matched by effective e-regulation. This is still some way off.
What about the Technophobes - and Women?
Insurers seeking to get closer to customers and build relationships continue to try and avoid unprofitable customers, who more and more are those who are technophobic, who cannot or do not want to use new communications technologies, and who rely on face-to-face transactions.
Women stand to lose out substantially from marketing developments, suggests a survey by Durlacher in September 1999. Overall, they have lower incomes than men, are less highly prized as customers, and they also include a far higher proportion of technophobes. This is very important in the early 21st century, when e-commerce and m-commerce are developing rapidly.
Women account for only 35% of Internet users in the UK. Those who do go online are much less likely than men to visit news and information sites, 35% compared with 51%. Women are less confident users, with 30% of existing female users wanting better training and support, compared with only 9% of male users.
Riskier World
Mis-selling litigation - which could in time affect endowments as well as pensions - is a big risk for life insurance companies, as are natural disasters for general insurers. Climatologists are predicting more stormy, wet and windy weather in coming years, leading to floods, subsidence, structural damage from winds, and so on, all of which will push premiums up.
Another pressure will come from environmentalists. Early in 2000, Friends of the Earth published a report called Capital Punishment, the Insurance Industry and the Global Environment, which castigates insurance companies for investing in multinationals which pollute the environment, and recommends that governments insist on companies publishing environmental balance sheets.
Constraints Impede Growth
By 2003, long term insurance is likely to have slightly increased its share of all personal lines insurance, reflecting the introduction of stakeholder pensions. Overall, Market Assessment expects steady growth of about 14% in real terms in long term insurance, and 11% in general insurance, less than the government would like, but constrained by individuals' reluctance to put money aside for possible future risks, environmental policies which will curb growth in vehicle use continued pressure on prices exerted by direct sellers - including companies selling on the Internet. Insurance companies still have a major task of persuading the public that there are significant economic advantages in taking out insurance. Insurance ISAs are not expected to have a significant impact on the market.
The companies well placed to prosper in an environment of very tight margins are those able to combine low-cost distribution with customer retention. So far, direct insurers have been bad at keeping their customers, with consequent heavy spending on recruiting new ones. CGU and the Halifax are among the leading insurers working hard on the distribution-retention equation. CGU, the UK's biggest insurer, has the added advantage of scale - significantly increased if the planned merger with Norwich Union goes ahead. The Prudential already has a strong Internet presence - crucial in the coming years - and is stronger than CGU in long term insurance, which is less vulnerable than general insurance to intense price competition because of its complexity. The AXA group has the advantage of world scale Legal and General and Norwich Union have impressive records of new product development. Smaller insurers are already being parcelled up for distribution: NatWest Life, for example, would go to Prudential if Bank of Scotland takes over the parent bank. Royal and Sun Alliance, Equitable, Britannic and United are prominent among the companies which need to move sharply to develop and promote new products - and stronger corporate branding. United left it too late: it was bought by Royal London as this report was completed.
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