A view from CGU Insurance

Hardening market will help standards

The insurance industry is by its very nature cyclical, with a natural rhythm of hard and soft markets. However, at this particular time it seems different.

The industry has been bumping along the bottom of depressed premiums for far too long, with too many external factors in play for the market ever to be the same. This soft market causes real difficulties both for insurers and brokers with the latter's margins being squeezed as commission payable on reduced premiums impacts very quickly on the bottom line.

While the UK economy has been growing, the insurance industry has been lagging behind. The total premium income for general insurance has remained virtually at a standstill since 1994, despite inflation over that same period of 16%. The industry made an underwriting profit of over £1.2bn in 1994 but has been eroded over the years to an estimated underwriting loss in 1998 of £1.5 billion – a turnaround of £2.7bn.

Preliminary results for 1999 do not suggest there is any drastic improvement occurring.

The main cause of the losses have been the motor insurance market. Average premiums over the past five years have reduced by 10% despite a total claims bill which has grown by nearly 22%. Repair costs have increased by 18% and these factors have produced an estimated underwriting loss in 1998 of £1.3 billion.

Other classes are suffering just as well. Liability premiums are down 2.9% over the period despite the average cost per claim increasing by over 50%. Commercial property premiums are down 6% even though re-building costs are up 15% and fire claims are up 42%. We have also had two bad weather incidents over the last five years, which means that average weather claims are 56% higher.

It should also be remembered that premiums paid today have to meet tomorrow's claims and therefore there is a need to take into account inflation and anticipated increase in claims costs in the foreseeable future. There are genuine fears, for example, that changing weather patterns will mean that the freak weather events of recent years will increasingly be the norm.

Society, too, is changing with a trend towards litigation fuelled compensation culture, augmented by legal changes such as the adoption of Ogden tables, the recent Woolf report, and no-win, no-fee services being increasingly offered by many solicitors. The boom in the construction industry is causing rebuilding costs to rise even faster and we are facing the unknown fact of increased fraud claims because equipment is obsolete as a result of it not being 2000 compliant.

Motor repair costs are expected to rise rapidly because there is a danger of demand exceeding supply following the rationalisation in the vehicle repair industry.

It is perfectly understandable therefore, that rates are beginning to move upwards across the market. This has started with motor insurance and is now moving into the liability and property market.

This is important if the industry is going to maintain a standard of service to its customer. The bonus for brokers for carrying rating increases are high, as every extra premium carried once again impacts on the bottom line this time positively. If the industry overall does not make money then it becomes a weakened industry which is very vulnerable. It will increase the pace of consolidation and perhaps force the UK insurance industry to go the way of other basic UK companies and become totally foreign controlled in the same ways of the motor industry, investment banking, computer manufacture and re-insurance.

The stakes are high and it is important that the current level of underwriting losses are reversed.

This article is taken from CGU's latest Business Intelligence service “It's a Changing World!”. Copies are available from your local CGU branch.