The UK commercial insurance industry is set for a boom, and the next five years will show massive premium increases in many sectors. Richard O'Donoghue reports on how the market will change
Fierce competition and rising claims costs have battered commercial insurers, but some lines of business, such as motor, have fared better than others, according to the latest returns filed with the Financial Services Authority (FSA).
During 2000, the commercial motor insurance market forged ahead with strong premium increases, while property insurance struggled.
In 2000, the UK commercial insurance market was worth £13.5bn in gross written premiums, an increase of 1.8% on the previous year. This is minimal growth in comparison to the personal insurance market, which grew by 8.9% over 2000. Nevertheless, the growth rate in the commercial sector is nearly double the annual average between 1996 and 2000.
This is a substantial burst of pace for any market. The boost was almost entirely fuelled by commercial motor, in particular fleet, which grew by 14.7% over 2000 as insurers significantly raised their rates to combat claims inflation. Above average premium growth was also demonstrated by the group accident and health and the pecuniary loss insurance markets.
The next five years will show significant growth in premium income. The improvement in annual growth in 2000 of 1.8% will develop into a much healthier average annual growth rate of 5.2% over 2000-2006, leading to a market value of approximately £18bn in 2006. The commercial motor and property insurance markets will drive the bulk of this growth
Over 2000 the healthy growth was checked by the general liability market, which continued its annual decline, and the commercial property insurance market, which saw its premium income shrink by 6.1%. A key reason for this is insurers' unwillingness to significantly raise rates for fear of losing customers. The rate increases of 3% to 5% implemented over 2000 were inadequate to strengthen the books.
The commercial market as a whole has demonstrated sluggish growth and there has also been little movement in the market shares of the key players.
The five biggest commercial insurers: CGNU, Royal & SunAlliance (R&SA) , AXA, Zurich Financial Services and Allianz Cornhill, account for 50% of the commercial market. CGNU, the market leader, saw its share drop by 1.7% over 2000. This is a reflection of its desire to trim its books at the expense of market share in an effort to improve profitability. Zurich, the fourth largest commercial insurer, made the greatest increase in market share of 0.4% among the top five players, an increase driven primarily by growth in its commercial motor business.
The biggest change in the competitive structure of the top ten commercial insurers over 2000 (in terms of gross earned premiums) has come about as a result of the loss of Independent Insurance. Independent was the eighth largest commercial insurer, with 2% of the market. This was swallowed up by a variety of players when the company went into liquidation in the summer of last year. The collapse of Independent and, therefore, the lack of FSA returns in 2000, means Groupama is now in the top ten. However, with its UK business up for sale, it represents an opportunity for a competitor to add 1.3% of the commercial market to its books.
The year 2000 saw the top ten players outstripped in terms of premium growth by the next ten largest insurers. The average growth rate for the top ten insurers over 2000 was 4.8%, while the next ten largest companies demonstrated a much stronger average rate of 13.7% over the same period.
However, in the wake of the events of 2001, this rapid growth among the medium-sized players may be checked by a flight to security. Confidence in the financial transparency and strength of insurance companies has been dented by the collapse of Independent Insurance and the impact of spiralling reinsurance premiums following 11 September, particularly in commercial property.
As a result, commercial insurance brokers and their clients may be increasingly attracted by the seemingly more financially secure, larger insurers. Some of this interest, however, may not be entirely welcome for the big players, who are currently divesting themselves of unprofitable business, particularly the larger, more diverse risks, in an effort to tighten up their books.
What of the future? Now, more than ever, the industry is calling for and implementing substantial rate increases.
The motor market has suffered from rising claims costs and has experienced some significant increases in premium rates as a result. However, rate hikes may have reached a plateau in this market and as a result the average annual growth rate in GWP over 1996 to 2000 of 6.9% will only increase marginally to 7.1% over 2000 to 2006.
The commercial property insurance industry is the one to watch. Last year's events in the US have sent this market into overdrive. Reinsurance costs have rocketed and insurance premiums on higher risks, such as large, important buildings, have shot up by as much as 80% to 100%. As a result, the decline of 5.3% experienced by the market over the 1996 to 2000 period is set to reverse substantially between 2000 and 2006 to an average annual growth rate of 8.1%, boosted predominantly by a sharp increase in premiums during 2002. n Richard O'Donoghue is general insurance analyst at Datamonitor
Datamonitor's report: UK Commercial General Insurance 2002 is £1,495. To purchase, call Datamonitor on 0207 675 7487.