The UK non-life market is mature and underlying growth in exposure is expected to follow broadly in line with GDP, with some prospects for growth longer term in areas such as accident and healthcare.

General outlook
The UK non-life market is mature and underlying growth in exposure is expected to follow broadly in line with GDP, with some prospects for growth longer term in areas such as accident and healthcare. The major players - which typically have a broad presence in the UK non-life market, including the London Market, and are often supported by international operations and, in many cases, life operations - are likely to benefit from consolidation of the market, as many have the financial capacity to acquire smaller or struggling insurers.

Premium income levels are cyclical - in 1999, there were rate rises in some lines of business, notably motor. Motor rate increases continued during 2000 by as much as 20% in some instances, but have slowed in 2001. Increases on other lines of business are being achieved on a broad front. The combination of harder rates and more selective underwriting should lead to improved underwriting results for 2001.

Consolidation among UK market leaders since 1996 removed little capacity from the market, as most of the larger deals were structured as mergers - notably the mergers of Royal Insurance and Sun Alliance in 1996, Zurich and BAT (Eagle Star) in 1998 and, most recently, Norwich Union and CGU in 2000 (itself the result of the 1998 merger of General Accident and Commercial Union).

However, the trend has begun to change. The acquisition of London & Edinburgh by Norwich Union in 1998 was a cash offer and the acquisition of GRE by Sun Life and Provincial Holdings (AXA Group) in 1999 was made by a mixture of cash and shares. Neither deal has significantly reduced market capacity, but has helped to increase market discipline such that rate rises were pushed through in 1999 more successfully than in 1998. Strategic repositioning of some large groups has reduced capacity in some lines - particularly reinsurance and large corporate risks.

Capacity in the market has been squeezed during 1999 and 2000 due to weak underwriting results, lower yields on investments, poor equity prices at year end 2000 and the capital needs for growing life businesses. In addition, some companies have begun to repatriate capital to shareholders. The withdrawals of companies such as Independent Insurance and Reliance National have also shrunk capacity.

On the positive side, consolidation has increased the market shares of the largest players, all of which have a strong focus on increasing profitability.

Competition from direct writers, niche players and international players will restrict rate rises in some lines, but the majors will be able to exert influence in lines where they have leadership positions and strong distribution such as small and medium-sized businesses and business generated through corporate ties.

Profitability will lag the trend in rate increases. Combined ratios peaked in 1998 at 112% for the company market, falling to 111% in 1999. The impact of the autumn floods led to a small rise in the combined ratio in 2000, but 2001 is expected to show an improvement on 1999. The investment return contribution will be lower than in recent years, given the lower yields available. Investment in equities will produce volatility in results and capital, particularly as the FTSE closed on a high at the end of 1999 and then plummeted in 2000. Reinsurance costs will be a drag on earnings in 2001, as direct rates will not be increasing at a similar rate.

Motor business
Motor business gross premiums written in the U.K. grew 20% in 2000, a notable acceleration in the upward trend started in 1997. According to information from the UK Annual Financial Services Authority (FSA) Insurance returns, as held in Standard & Poor's SynThesys database, there are now 87 companies writing motor business, with total gross premiums written amounting to £9.57 billion in 2000. Of these, the top 10 groups accounted for 86% (1999: 87%) of total gross premium written and the top five for 65% (1999: 69%).

Additionally, various syndicates at Lloyd's wrote £2.028 billion of gross premiums under the "motor, damage, and liability" class of business during the 2000 calendar year, which equates to 17% of total motor business in 2000.

As a result of the premium growth, underwriting performance appears to have improved in 2000, with the average motor combined ratio falling to 113% from 118% in 1999. However, achieving profitable levels of underwriting remains elusive to many of the companies writing motor insurance. In the years 1985 to 2000 only in 1993 and 1994 did overall motor combined ratios fall below the 100% "breakeven" level into profitability.

Early indications for 2001, based upon preliminary figures for the first six months of the year, are that double-digit rate increases continue to be enjoyed by the U.K. motor market, with further improvements in overall operating performance expected, although the combined ratio will remain well over 100%.

Loss ratios for 2000 are still high, but overall have improved to 91% in 2000 from 95% in 1999. Expense ratios improved slightly in 2000 to 22% from 23% in the previous year.

The general trend shown in 2000 for the five largest motor insurance groups was a combined ratio improvement of two percentage points but within this group the combined ratio for Royal & Sun Alliance deteriorated by two percentage points while for CGNU PLC the same ratio improved by three percentage points.

In terms of premium volume, CGNU is the breakaway leader of the motor class, commanding an impressive 23% of total gross premiums written in 2000 and recording a better-than-average combined ratio of 110%.

Direct Line Insurance, part of the Royal Bank of Scotland group, recorded an expense ratio in 2000 of 11%, significantly better than the industry average of 22%. Low expenses and a good loss ratio of 89% meant it achieved a breakeven combined ratio of 100% in 2000.