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Insurance Prospects Market Assessment 2008
Key Note Publications Ltd, July 2008, Pages: 240
The threats facing insurers operating in the UK include: a decline in public confidence in financial products; write-downs on credit losses; the risk of weather disasters; longevity affecting pension assumptions; and energy, food and mineral shortages that will restrict and may eventually reverse economic growth, leading to job losses and lower incomes accompanied by price inflation. These threats are doubly worrying because financial-services companies — banks and insurers — dominate the world economy. UK financial-services groups, including insurers, have suffered from the bad-credit virus that infected the globe in 2007 and 2008, but to differing extents.
The leading UK companies in long-term insurance in 2006 were Standard Life, Aviva's Norwich Union, Legal & General, Prudential and Lloyds TSB. The leaders in general insurance were Norwich Union, The Royal Bank of Scotland Group (RBS Group), AXA, Royal & Sun Alliance (RSA) and Zurich Financial Services. In health insurance, BUPA and AXA dominated. The most heavily advertised insurance product in the UK in the year ending December 2007 was the price-comparison site www.confused.com, owned by Admiral Group. Across all insurance brands, RBS Group's Direct Line spent the most on advertising to consumers during 2007.
According to our own research for this report, the British public rated leading insurance companies more highly in 2008 than in a comparable survey in 2002. Furthermore, more than seven people in ten regarded the insurance they bought as good value. The proportion of online purchasers of insurance had risen more than sevenfold between 2002 and 2008, to almost four people in ten. Price-comparison sites are an important feature of the market, used by in excess of one person in four. However, despite the improved ratings, nearly half of adults thought that insurance companies were too remote from their customers, and more than a quarter still preferred to buy insurance from a company with a local branch or representative.
In 2006, the 40% of UK households with the lowest incomes spent, on average, less than £17.50 a week on all types of insurance, including life and pensions. At the other end of the scale, the top 10% of households by income spent almost £110 a week on these products. Around 60% of all households have insufficient income to insure and invest adequately for the long term. Those ranking between the lower two-thirds and the top quarter of the income range generally try to keep themselves solvent, but many have been dipping into home equity to maintain their lifestyles. Their stretched finances have worrying implications for insurance sales. Nevertheless, the households in the top quarter of the income distribution are financially comfortable in the main, and many of these could increase their insurance expenditures.
The reports of credit-rating agencies influence investors. The agencies have suffered criticism for over-rating issuers of dubious financial paper, and by spring 2008 were implementing programmes to increase the reliability of their judgements. Their assessments are very important in the financial sector, because measures of the value of insurance and banking groups are complex and numerous, and are often opaque to investors and customers. In the EU, the lengthy process of improving insurance regulation was still under way in 2008, with the aim of increasing both stability and public confidence in the insurance sector. More and better financial education is necessary to equip the public to evaluate the insurers and banks that seek their custom.
The clogging of the world's financial networks with low-value and worthless debts is, in 2008, the major issue facing insurance companies. Within this caution-inducing context, insurance prospects are most attractive in South and East Asia (including China and India), in Latin America and in Eastern Europe. In the UK, the life, pensions and annuities sectors ought to be buoyant, because individuals are concerned about the prospect of poverty in retirement — but, for the majority of the population, a lack of disposable income to put aside is a significant issue. At the top of the income scale, however, self-invested personal pensions (SIPPs) have a bright future.
In general insurance, the categories of employers' and public liability, professional indemnity, and general insurance packages for business, are at the heart of growth, but motor and household insurance remain the `bread and butter' sectors for general insurers. The issue of affordable household cover for customers in zones of rising flood risk remains unresolved.
Unlimited international capital flows prevent national and regional populations from shaping economies to suit their own requirements, and in our opinion should be reined back. A healthy insurance sector needs a prudent, well-informed and solvent population, living in a stable society where the Government receives sufficient tax revenues to fund public services — and customers need to be confident that when they save over many years, or make a claim, their insurance company will provide what was originally projected or promised. We believe that it is in insurers' own long-term interests to promote strong national economies, to aim for unspectacular but steady growth in clients' funds, and to be reliable rather than daringly expansionist.
In current conditions of commercial uncertainty, there is scope for a revival of mutual societies.
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