Datamonitor reports on the state of household insurance and predicts what lies ahead
Datamonitor's new report, UK household insurance 2003, finds that insurers' gross written premiums (GWP) rose 14.1% in 2001, making the market worth £5.6bn. The industry has been hit by soaring reinsurance rates, and heavy claims in recent years. Claims are increasingly dominated by damage caused by weather, which now accounts for almost half of all claims. In response to this, many insurers are dropping market share by removing unprofitable business from their books. Retailers are increasingly interested in offering insurance products, and this sector of the market grew by 70%, in terms of gross written premiums, in 2001.
After bad weather dampened experiences in recent years, household insurers appear to have started on the road to sunnier results in 2001. Although still saddled with the dark cloud of a negative underwriting result, the silver lining is that in 2001 both GWP and net written premiums (NWP) rose substantially.
In 2001, the UK household insurance market was worth £5.6bn in GWP, up 14.1% on the previous year. This follows growth of 5.2% in 2000, and shows that insurers are pushing to regain profitability after five years of negative underwriting results.
More importantly, 2001 saw these GWP rises translate into an increase in NWP, after two years of decline. According to ABI statistics, reinsurance ceded had grown by 82% in two years, meaning insurers are seeing less and less of the GWP on their balance sheets.
However, 2001 marks the first year when GWP increased sufficiently to account for rising reinsurance, and also produced a 10.7% increase in NWP. This helped push the underwriting result up 16.2%, though even this left insurers with a £362m deficit.
The hard market, further bad weather in 2002 and the effect of 11 September on the reinsurance market, means that premiums are likely to keep on rising. Datamonitor estimates, in 2002, the household market was worth £6bn in terms of premium income.
The claims experience for household insurers continues to be a difficult one, with claims up by 4.7% in 2001. In 2002, weather damage claims were up 26% from 2001, and accounted for almost half of all claims by value. This was mainly due to storm claims, which rose by 54% in 2002, reflecting a number of bad weather events in 2002, rather than a single catastrophic event, as in 2000.
The question of long-term climate change in the UK divides insurers, though all recognise that our approach to flood defences was in need of a radical overhaul.
The government responded to these industry concerns in March 2003 with a detailed reassessment of what flood minister Elliot Morley described as the UK's "400-year-old antiquated management system".
Extra funding, which by 2005/6 will take flood defence spending to £564m, and will be allocated through a new scoring system, has been released. Flood defence management for high risk rivers will be undertaken by the Environment Agency, and flood defence regions are to be revised to create a single tier of flood defence committees.
The government also plans to tighten restrictions for floodplain development, and has released a data set aimed at improving flood risk rating. Though these moves have been welcomed by the industry, some insurers have criticised the data set as being unhelpfully presented, and the planning restrictions as not being severe enough.
In 2001 seven of the top ten household insurers dropped market share, with Norwich Union registering the largest decline with a 5.7% loss. In total, the top ten insurers lost 8.6% of market share, and are now down 10% from 1999. This shows the continuance of the trend whereby household books are being 'cleaned' of unprofitable and non-core business.
Profitability is still the key concern, and the large insurers are prepared to keep conceding market share in return for a better underwriting result. This strategy appears to be bearing fruit, as the average combined ratio for the top ten insurers in 2000 was 102.4%, and had dropped to the profitable level of 95.5% in 2001.
Against this, there has been considerable growth in insurance offered by retailers, or "brandassurance". Although "brandassurers" have only 3% market share, their GWP grew by over 70% in 2001, as more and more retail players started to offer insurance products. With large and regular customer bases (Marks & Spencer claims to have 17 million regular shoppers), there are obvious sales opportunities for these companies.
In March 2003, Asda, the UK's third largest supermarket, launched its own insurance portfolio as a spearhead for a major assault on the financial services market. The move meant that the top three UK supermarkets now offer household insurance, along with high street stores like Marks & Spencer, Argos and Debenhams. Datamonitor believes although the impact of these offerings on established insurers is so far negligible, as supermarkets and other retailers push to provide for more of their customers' needs, "brandassurers" look likely to keep growing.
The author of the Datamonitor report, UK Household Insurance 2003 is George Wigley, financial services analyst.
Contact Datamonitor on 0207 675 7487