Imagine a world where insurance didn't exist. The most obvious scenarios of companies going bankrupt after a major fire and Mr Joe Smith having to walk to work after crashing his car all spring to mind. But what affect would its absence have on UK society overall?

According to the Office of National Statistics, the UK insurance industry contributes nearly 2% in terms of “value added” to the British economy.

The Association of British Insurers however, believes this figure does not begin to convey the full extent of the industry's contribution. It goes as far as to say that insurance is fundamental to the economy and adds: “If the insurance industry did not exist, then the economy would not operate as smoothly and efficiently as it does at present.”

In its information document, The Contribution of Insurance to the UK Economy, the ABI points out some of the key points that show how the industry contributes indirectly in its role as a manager of the nation's wealth and in its activity of pooling risks.

According to the report the British insurance market is the biggest in Europe and the third-largest in the world, accounting for 8% of total worldwide premium income (£109bn in 1998).

Major employer

It also adds that it is an important employer, with around 370,000 people working for insurance companies, Lloyd's insurance brokers and a variety of auxiliary occupations. And in every year over the past ten years, around 1.6% of total UK employment has been in the insurance sector.

Another important point is that without insurance, individuals and business would have to bear an enormous financial risk every time they did more or less anything. The report states that by pooling risk, insurance helps to stabilise and facilitate business activities by allowing firms and individuals to manage their risks more efficiently.

Insurance everywhere

Mary Francis, director-general of the ABI, comments: “British insurers underpin the UK economy. There is virtually nothing we do – as individuals or businesses – which does not rely on insurance to some extent.

“We invest almost 30% of our personal wealth with the insurance industry and it is well aware of its crucial role in the lives of its customers. The launch of the General Insurance Standards Council (GISC), together with ABI's new general insurance Claims Code, should also help make buying – and claiming on – general insurance products more straightforward.”

As an industry however, UK insurance is laden with tales of low profit ratios and underwriting losses, especially in the motor and property classes. All of which raises questions about overall profitability.

Reducing overcapacity

Nigel Munns, an associate with analysts Bacon and Woodrow, says that overall the operating ratio of the UK insurance industry in 1999 was 114%. “This is not good,” he says. “The industry lost money in 1999 compared to most of Europe and the US. This is mostly because it is not charging enough for premiums and because of overcapacity and competition.

“This overcapacity needs to be reduced and it is already starting to happen naturally with the merger and acquisition activity and people dropping out of the market. There is less competition now than a few years ago and there will be more sustained profitability when the market is controlled by fewer players who are a position to raise prices.”

In reference to the major classes of insurance business, he says that according to 1999 Financial Services Authority returns the gross written premium for property was £8.7bn with an operating ratio of 108%. Motor had a gross written premium of £7.3bn with an operating ratio of 119% and accident and health had a gross written premium of £3.7bn and an operating ratio of 102%.

“Motor is beginning to harden and the market was looking at a 20% to 25% rate increase last year, but property rates are not rising at the level needed,” he adds.

The ABI Statistical Review of the Nineties, published this month, shows a similar picture. It states that general insurance business made an underwriting loss of £2.3bn in the UK and £3.5bn worldwide. In motor, it states that insurers reported a UK underwriting loss of £1.3bn last year, adding that companies have only made an underwriting profit in two out of the past ten years – £91m in 1993 and £297m in 1994.

But it is not all doom and gloom, the report states that insurers investment holding totalled £1,092bn last year. This is three times more than ten years ago, when companies invested assets were £309bn. British insurers also now own a fifth (21.6% ) of all UK shares.

Local and global

In addition, over the period between 1987 and 1998, the total amount of personal wealth invested in insurance products grew by over 170% to £760bn and accounted for 29% of personal sector wealth by 1998, compared with 21% in 1987.

It also attracts foreign money into the UK and in 1998 the total overseas earning of British insurers were around £7bn.

Overall, the UK insurance industry is an important player on a world basis and its contribution to the UK economy is significant. But if the industry is going to continue competing globally, certain market issues need to be addressed to ensure a consistent level of profitability across all classes which in turn will ease the burden on investment income.