UK Household Insurance 2009

UK Household Insurance 2009

Introduction

This report provides a comprehensive analysis of the UK household insurance sector. An exclusive survey of over 3,500 consumers provides insight into buyer motivations and behaviours. The report also assesses the current market issues including the credit crunch and aggregators and includes data on market size, structure and underwriting profit, distribution channels and market shares.

Scope

*Consumer research on buyer motivations, methods of arrangement and switching behaviour based on an exclusive survey of over 3,500 consumers.

*Insight into the effects of the credit crunch, including the major changes to the competitor rankings.

*Data on the market share of the top brands and groups as well as an analysis of the marketing spend of the top brands.

*Forecasts of the future size of the market, its underwriting profit and the drivers that will affect the market going forward.

Highlights

The merger of Lloyds TSB and HBOS Group to form Lloyds Banking Group has created a home insurance powerhouse Datamonitor estimates that the new group becomes the third largest home insurance underwriting group, given the combination of Lloyds TSB Insurance and St Andrew's and esure.

The growing use of aggregators has served to increase consumers' focus on the price of home insurance. Interviewees commented that aggregators were a large part of the reason for the lack of price movement.

Over half of the sample aged between 18 and 29 had purchased their cover on the internet showing that an internet strategy is an important means of attracting younger buyers.

Reasons to Purchase

*Understand which of your competitors pose the greatest threat, which competitors are gaining market share and which are losing market share.

*Assess the marketing messages that will work best, the potential of the new business market and the most effective distribution channels.

*Gain insight into the future direction of the sector, including market size and underwriting profitability and the major issues affecting the market.

Overview 1
Catalyst 1
Summary 1
Methodology 1
Executive Summary 2
The credit crunch is having a major impact on the home insurance market 2
Lloyds Banking Group and Santander have gained significant market share from the credit crunch 2
Lloyds Banking Group has become the biggest distributor and the third largest home insurance underwriting group 2
Santander has become one of the top ten distributors of home insurance in the UK 2
Growth in the household insurance market was muted by strong competition in 2008 3
The market is estimated to have grown by 2% to £7.8 billion in 2008 3
The price of combined insurance policies came under pressure in the last two quarters of 2008 4
It is essential that providers stress a price based marketing message when selling home insurance 5
Providers need to stress the low price of their policies in order to acquire buyers of combined policies 5
An internet sales strategy is key to maximising sales of contents insurance among younger buyers 6
The market continues to grow and returns profits until 2012 under the neutral scenario 7
Premium rate increases are expected to drive growth in household GWP 7
The market will reach a peak of £9 billion in 2013 8
Household insurers make an underwriting profit until 2012 under the neutral scenario 8
Table of Contents 10
Table of figures 11
Table of tables 12
Market Issues 13
Introduction 13
The credit crunch is having a major impact on the home insurance market 13
Lloyds Banking Group and Santander have gained significant market share from the credit crunch 13
Lloyds Banking Group has become the biggest distributor and the third largest home insurance underwriting group 13
Santander has become one of the top ten distributors of home insurance in the UK 13
The recession will present new opportunities to target consumers with cheaper products 15
Consumers may reduce their level of cover in the recession 15
The recession will present new opportunities to target consumers with cheaper products 15
Insurers are likely to be faced with an increasing number of fraudulent claims 16
Some banks have seen their home insurance sales fall due to lower mortgage volumes 16
Aggregators are presenting opportunities and challenges for market participants 18
Aggregators are becoming a more important route to market 18
Use of aggregators will increase during the recession 19
Some home insurance providers have launched products to be used specifically on aggregators 20
Aggregators went on a huge marketing drive in 2008 20
A number of interviewees feel that aggregators are holding down price movements 21
The Pitt review could see government and insurers work more closely together to combat flood risk 21
The summer floods in 2007 are estimated to have cost the market approximately £3 billion in total 21
The Pitt report recommended a greater level of collaboration between the government and insurers 22
Market Context 24
Introduction 24
Growth in the household insurance market was muted by strong competition in 2008 24
The market is estimated to have grown by 2% to £7.8 billion in 2008 24
Combined insurance policies account for the majority of home insurance GWP 25
There was marginal price growth in 2008 with prices for combined and contents policies coming under particular pressure in H2 27
The price of combined insurance policies came under pressure in the last two quarters of 2008 27
The market for contents insurance policies became much more competitive in the third and fourth quarters of 2008 28
Insurers have been pushing up the price of buildings insurance policies 29
There is a vast potential market for household insurance 32
There is a potential market of 21.4m households in England 32
The number of households in England grew by 1.1% in 2008 providing home insurers with new business opportunities 33
Privately rented households are a growing market for household insurance providers 35
2008 was a far better year for claims costs 36
Claims costs fell by a quarter in 2008 36
Escape of water claims increased by 13.7% to £662m in 2008 38
Claims relating to flood and storm damage fell significantly in 2008 38
Domestic fire claims costs increased in 2008 39
Accidental damage claims costs declined to £397m in 2008 40
The average value of a theft claim rose by 7.4% to £1,086 in 2008 41
The number of burglaries increased slightly in 2007/8 42
Older and settled homeowners continue to represent the best theft risks for insurers 44
2008 was a good year for subsidence claims 46
The market returned to a profit in 2008 48
The market returned an underwriting profit in 2008 48
Distribution 49
Introduction 49
Banks and building societies are the largest distribution channel for home insurance 49
The majority of home insurance is distributed via banks and building societies 49
Brokers accounted for an estimated 26% of home insurance premium income in 2008 49
The direct channel accounts for around a quarter of home insurance premium income 49
Around 15% of home insurance premium income is distributed via the partnerships channel 50
The Lloyds TSB, Halifax and Norwich Union brands have the greatest market share 51
The Lloyds TSB brand is the market leader in the distribution of home insurance policies 51
Halifax was the top provider of combined contents and buildings policies while other top five distributors included Direct Line, Lloyds TSB, Norwich Union and More Th>n 53
Lloyds TSB was the top provider of contents only insurance policies and has a particularly strong hold of consumers aged over 60 54
Direct Line spent the most money on marketing home insurance products 56
Direct Line spent the most money on marketing home insurance in 2008 56
On average, the top 10 advertisers spent the largest proportion of their marketing budgets on direct mail, with brokers driving this trend 56
TV was an important medium for the top 10 advertisers, but was generally more important for direct insurers 57
Direct mail remained the preferred medium for buildings and contents advertisers ranked 11-20 58
Direct mail campaigns accounted for all of the marketing expenses of three advertisers ranked 11-20 58
Advertisers in the 11-20 group were less reliant on television campaigns to promote their building and contents insurance 58
Consumer Data 61
Introduction 61
There is a healthy market for home insurance products with over 60s consumers being the largest target market for combined cover 61
There is a healthy market for home insurance products 61
Consumers over the age of 60 are the largest target market for combined policies 62
Higher income households form the core market for combined home insurance cover while contents only cover is most popular with lower income consumers 63
Penetration rates are highest amongst AB and C1 consumers 65
It is essential that providers stress a price based marketing message when selling home insurance 67
Providers need to stress the low price of their policies in order to acquire buyers of combined policies 67
The promise of a cheaper quote will attract buyers of all ages however providers must place more emphasis on the secondary and tertiary buyer needs for middle aged consumers and those over 60 68
Home insurance providers must have a phone and internet sales strategy in order to maximise policy volumes 70
It is essential for home insurance providers to have a phone and internet sales strategy 70
Providers targeting the over 60s should ensure they have a phone based sales strategy when selling combined home insurance 72
A phone based sales strategy is important when targeting the over 60s consumer with combined buildings and contents cover 72
Mid to higher income households are most likely to buy a combined policy over the internet 73
AB and C1 consumers are most likely to purchase a combined policy over the internet 75
An internet sales strategy is key to maximising sales of contents insurance policies among younger buyers 76
An internet sales strategy is key to maximising sales of contents insurance among younger buyers 76
An internet strategy is the core way of reaching mid and higher income consumers when selling contents insurance policies 78
Internet sales of contents insurance policies dominate among AB and C1 consumers 79
There is a large new business market for providers to target 81
Consumers purchasing a combined buildings and contents policy are most likely to switch making them an attractive market segment to target 81
Buyers of combined buildings and contents policies show the same propensity to switch across all demographic groups 82
Switching rates of combined buildings and contents policies are broadly similar across age groups 82
Switching of combined contents and buildings policies stays relatively the same across household income bands 84
Switching of combined contents and buildings policies is fairly uniform across socio-economic groups 85
Consumers between the ages of 18 and 29 are the softest targets for contents insurance providers 87
Consumers aged between 18 and 29 are the softest targets for contents insurance providers 87
Higher income consumers are most likely to switch their contents insurance provider 88
AB and C1 consumers are most likely to move to a new contents insurance provider with between 30% and 32% having switched at last renewal 90
Competitive Dynamics 92
Introduction 92
The merger between Lloyds TSB and HBOS has created a giant home insurance underwriter and distributor 92
The Lloyds Banking Group is the third largest home insurance underwriting group 92
Datamonitor estimates that Lloyds Banking Group is the leading distributor of home insurance 94
Lloyds TSB and HBOS Insurance both launched new home insurance propositions in 2008 95
Sheilas' Wheels began offering home insurance in 2008 95
Lloyds TSB launched a new home insurance product for over 50s 96
Half of the top 10 managed to increase their market share in 2007 96
RSA witnessed the largest increase in market share of the top 10 household insurers 96
Legal & General increased its premium income to £255.7m in 2007 96
Lloyds TSB grew its market share to 5.4% in 2007 97
RBSI insurers, Direct Line, and UKI gained household insurance market share as premium income grew 97
Norwich Union remains the market leader, though its market share has declined 97
Churchill witnessed a significant fall in premium income in 2007 98
St. Andrew's suffered the largest decline in market share of all the top 10 competitors 98
Zurich witnessed a decline in its market share as its premium income decreased by 8.3% in 2007 98
AXA's market share declined as premium income fell to £306.4m in 2007 98
Few insurers in the 11-20 group increased their market share 101
Only three insurers increased market share in the 11-20 group 101
Hiscox increased its market share as a result of a 20% increase in premium income 101
Allianz witnessed its premium income increase significantly in 2007 101
Fortis, the Co-op and NIG lost premium income and market share 101
Fortis's premium income and market share slipped in 2007 101
All top 10 property insurers saw their loss ratios increase in 2007 due to the summer floods 104
The average loss ratio of the top 10 UK property insurers increased by 23.1 percentage points 104
St Andrews, Direct Line, Lloyds TSB and Zurich experienced significant increases in their loss ratios 104
Six insurers returned loss ratios that were below the market average in 2007 104
Allianz and RSA achieved the smallest ratios in 2007, which were significantly below the market average 104
AXA, Churchill, Norwich Union and NIG achieved below average loss ratios, despite seeing large increases 104
The average expense ratio of the top 10 property insurers increased in 2007, with NIG and Direct Line recording the largest individual increases 106
The average expense ratio of the top 10 property insurers rose by one percentage point in 2007 106
Churchill, Lloyds TSB and St Andrews achieved expense ratio reductions 106
Seven of the top 10 property insurers witnessed their ratios deteriorate in 2007 107
NIG and Direct Line experienced the largest increases in their expense ratios 107
RSA, Zurich, AXA, Allianz and Norwich Union saw moderate increases to their expense ratios 107
All top 10 property insurers saw their combined ratio increase in 2007 109
The average combined ratio of the top 10 property insurers rose by 24.1 percentage points in 2007 109
Four insurers saw their combined ratios increase by more than 30 percentage points 109
Churchill and Allianz recorded moderate increases to their combined ratios 110
Future Decoded 112
Introduction 112
The market continues to grow and returns profits until 2012 under the neutral scenario 112
Premium rate increases are expected to drive growth in household GWP 112
The market will reach a peak of £9 billion in 2013 113
Household insurers make an underwriting profit until 2012 under the neutral scenario 116
Competition restricts premium rate increases in the pessimistic scenario 117
Competitive pressures are forecast to keep rate increases low throughout the forecast period 117
GWP is forecast to rise marginally under the pessimistic scenario due to competitive pressures 118
The market moves into an underwriting loss as early as 2010 under the pessimistic scenario 120
The market sees better margins under the optimistic scenario 121
A stronger focus on restoring margin to the market will lead to strong growth in premium income 121
The market experiences stronger growth in 2009 and 2010, attaining a value of £9.3 billion by 2013 122
Underwriting profits improve substantially in the optimistic scenario, peaking in 2011 at £212m 124
APPENDIX 127
Distribution definitions 127
Banks/building societies 127
Broker 127
Company staff 127
Direct 127
'Other' company agents 127
Partnerships 127
Datamonitor Consumer Survey 127
Further reading 129
Ask the analyst 129
Datamonitor consulting 129
Disclaimer 129
List of Tables
Table 1: UK home lending volume and value, 2004-08 18
Table 2: Estimated aggregator-instigated home insurance sales, 2007e-2008e 19
Table 3: UK household insurance GWP, 2004-08e (£m) 25
Table 4: Estimated split of household insurance GWP by type of cover, 2008 (£m) 27
Table 5: Average household insurance premium rates, January 2007-09 (£) 31
Table 6: The size and tenure of households in England, 2008 (000s) 33
Table 7: The number of households in England, 2005-08 (000) 34
Table 8: Trends in household tenure for England, 1998-2008, (000s) 36
Table 9: UK domestic property insurance claims by peril, 2004-08 (£m) 37
Table 10: Escape of water claims cost and number of claims for escape of water in the UK, 2004-08 38
Table 11: Gross claims incurred for domestic property weather claims, 2004-08 (£m) 39
Table 12: UK claims incurred by fire, domestic and total, 2004-08, (£m) 40
Table 13: Accidental damage claims costs and the number of claims for accidental damage in the UK, 2004-08 41
Table 14: Number of household theft and average theft claims cost in the UK, 2004-08 42
Table 15: Number of burglaries in England and Wales, 2001/02 to 2007/08 43
Table 16: UK unemployment, Q4 2004-Q4 2008 44
Table 17: Household types by risk of burglary in the UK, 2005/6 to 2007/8 46
Table 18: Average subsidence claims cost compared to claims costs and number of claims for subsidence in the UK, 2004-08 47
Table 19: Household insurance GWP distribution by channel (All business), 2004-08e 51
Table 20: With which of these insurance providers are you insured for your home insurance policy/s? Top ten responses split by age (September 2008) 52
Table 21: With which of these insurance providers are you insured for your combined contents and buildings insurance? Top ten responses split by age (September 2008) 54
Table 22: With which of these insurance providers are you insured for your home contents insurance? Top ten responses split by age (September 2008) 56
Table 23: Top 10 building and contents advertisers' spend by media, 2008 (£) 58
Table 24: Top 11-20 building and contents advertisers' spend by media, 2008 (£) 60
Table 25: Which of the following types of insurance are you covered by? (September 2008) 62
Table 26: Which of the following types of insurance are you covered by? Responses split by age (September 2008) 63
Table 27: Which of the following types of insurance are you covered by? Responses split by household income (September 2008) 65
Table 28: Which of the following types of insurance are you covered by? Responses split by socio-economic group (September 2008) 67
Table 29: Why did you take out your home insurance with your current provider? Top five responses (September 2008) 68
Table 30: Why did you take out your home insurance with your current provider? Top five responses split by age (September 2008) 70
Table 31: How did you arrange the home insurance policy you currently have? (September 2008) 71
Table 32: How did you arrange the combined contents and buildings insurance policy you currently have? Responses split by age (September 2008) 73
Table 33: How did you arrange the combined contents and buildings insurance policy you currently have? Responses split by household income (September 2008) 74
Table 34: How did you arrange the combined contents and buildings insurance policy you currently have? Responses split by socio-economic group (September 2008) 76
Table 35: How did you arrange the home contents insurance policy you currently have? Responses split by age (September 2008) 77
Table 36: How did you arrange the home contents insurance policy you currently have? Responses split by household income (September 2008) 79
Table 37: How did you arrange the home contents insurance policy you currently have? Responses split by socio-economic group (September 2008) 80
Table 38: When you last renewed your home insurance did you change company or stay with the same one? (September 2008) 82
Table 39: When you last renewed your combined contents and buildings insurance did you change company or stay with the same one? Responses split by age (September 2008) 83
Table 40: When you last renewed your combined contents and buildings insurance did you change company or stay with the same one? Responses split by household income (September 2008) 85
Table 41: When you last renewed your combined contents and buildings insurance did you change company or stay with the same one? Responses split by socio-economic group (September 2008) 86
Table 42: When you last renewed your home contents insurance did you change company or stay with the same one? Responses split by age (September 2008) 88
Table 43: When you last renewed your home contents insurance did you change company or stay with the same one? Responses split by household income (September 2008) 89
Table 44: When you last renewed your home contents insurance did you change company or stay with the same one? Responses split by socio-economic group (September 2008) 91
Table 45: Impact of Lloyds TSB and HBOS merger on the competitive position of the top 10 home insurance underwriting groups 94
Table 46: Top 10 UK household insurance competitors by GWP and market share, 2006-07 100
Table 47: 11-20 household insurance competitors by GWP and market share, 2006-07 103
Table 48: Premium income compared to change in loss ratio for the top 10 UK property insurers, 2006-07 106
Table 49: Premium income compared to change in expense ratio among the top 10 property insurers, 2006-07 109
Table 50: Premium income compared to change in combined ratio among the top 10 property insurers, 2006-07 111
Table 51: Key variables affecting household insurance GWP, neutral scenario, 2009-13 113
Table 52: Forecast of household insurance GWP, neutral scenario, 2009-13 (£m) 115
Table 53: Forecast of UK household insurance underwriting result, neutral scenario, 2009-13 (£m) 117
Table 54: Key variables affecting household insurance GWP, pessimistic scenario, 2009-13 118
Table 55: Forecast of UK household insurance GWP, pessimistic scenario, 2009-13 (£m) 120
Table 56: Forecast of UK household insurance underwriting result, pessimistic scenario, 2009-13 (£m) 121
Table 57: Key variables affecting household insurance GWP, optimistic scenario, 2009-13 122
Table 58: Forecast of UK household insurance GWP, optimistic scenario, 2009-13 124
Table 59: Forecast of UK household insurance underwriting result, optimistic scenario, 2009-2013 (£m) 126
Table 60: Breakdown of consumer survey respondents by household income and age 128
Table 61: Breakdown of consumer survey respondents by socio-economic group 128
List of Figures
Figure 1: Lloyds Banking Group has become the number one distributor of home insurance while Santander has become the ninth biggest distributor 3
Figure 2: Strong competition meant the home insurance market saw marginal growth in 2008 4
Figure 3: There was a strong element of price competition in the last two quarters of 2008 5
Figure 4: A price based message is particularly attractive to consumers buying a combined policy 6
Figure 5: Over 50% of consumers aged between 18 and 29 purchased their contents insurance policy over the internet 7
Figure 6: Household GWP will rise at an average annual rate of 3%, reaching £9 billion in 2013 under the neutral scenario 8
Figure 7: The market is forecast to be profitable for most of the forecast period, under the neutral scenario 9
Figure 8: Lloyds Banking Group has become the number one distributor of home insurance while Santander has become the ninth biggest distributor 14
Figure 9: Tesco Personal Finance launched a "no frills" home insurance package in June 2008 16
Figure 10: Banks saw their opportunity for mortgage related home insurance sales plummet in 2008 17
Figure 11: Aggregator-instigated home insurance sales doubled in 2008 19
Figure 12: Aggregators were focused on building their brand in 2008 21
Figure 13: Strong competition meant the home insurance market saw marginal growth in 2008 25
Figure 14: Combined insurance policies account for the majority of home insurance GWP 26
Figure 15: There was a strong element of price competition in the last two quarters of 2008 28
Figure 16: Contents insurance prices came under real pressure in the last two quarters of 2008 29
Figure 17: The market average price of buildings insurance grew strongly in the fourth quarter of 2008 30
Figure 18: Home insurance providers can target a potential market of 6.7m rented households and 14.6m owner occupied households in England 32
Figure 19: The number of households in England continues to grow 34
Figure 20: The private rented sector is a growing market for household insurance providers 35
Figure 21: Weather related claims decreased significantly in 2008 as claims volumes returned closer to normal levels 37
Figure 22: Flood and storm related claims fell significantly in 2008 39
Figure 23: Domestic fires accounted for almost a third of total fire claims costs in 2008 40
Figure 24: The number of theft related household insurance claims fell to 328,000 in 2008 42
Figure 25: The number of burglaries in England and Wales increased marginally in 2007/08 43
Figure 26: Older homeowners are the least likely to be burgled 45
Figure 27: Insurers benefited from low subsidence claims costs in 2008 47
Figure 28: Datamonitor estimates that the household insurance market will have recorded a profit of over £100m in 2008 48
Figure 29: Banks lost market share in the home insurance market as mortgage linked sales declined in 2008 50
Figure 30: The Lloyds TSB insurance brand is the leading provider of home insurance 52
Figure 31: Halifax's strength in the mortgage market makes it a key distributor of combined contents and buildings insurance policies 53
Figure 32: Lloyds TSB is the number one provider of home contents insurance while RIAS clearly scores well with the over 60s 55
Figure 33: The top 10 marketers made heavy use of direct mail in 2008 57
Figure 34: Direct mail is heavily relied upon among the 11-20 advertisers to market to consumers 59
Figure 35: There is a high penetration of home insurance products 62
Figure 36: The over 60s are the largest target market for combined home insurance policies 63
Figure 37: Providers should target their combined contents and buildings insurance offer at consumers in the mid to higher income bands 64
Figure 38: Combined policies are most popular with AB and C1s whereas contents only policies are most popular with consumers in the DE band 66
Figure 39: A price based message is particularly attractive to consumers buying a combined policy 68
Figure 40: A price based message will work well with consumers of all ages however providers should emphasize other factors as well to middle aged consumers and those over 60 69
Figure 41: Home insurance providers should ensure they have a phone and Internet sales strategy 71
Figure 42: The vast majority of consumers aged over 60 will buy their combined policies over the phone 72
Figure 43: Affluent consumers are more likely to buy a combined policy over the internet 74
Figure 44: Internet sales of combined cover dominate amongst AB and C1 consumers whilst phone sales dominate amongst C2 and DE consumers 75
Figure 45: Over 50% of consumers aged between 18 and 29 purchased their contents insurance policy over the internet 77
Figure 46: Internet sales are a key part of acquiring mid to higher income consumers 78
Figure 47: AB and C1 consumers are most likely to buy their contents policy over the internet 80
Figure 48: 40% of consumers with a combined policy changed their provider at the last renewal 81
Figure 49: The proportion of consumers switching their combined home insurance provider varies little by age group 83
Figure 50: A similar proportion of consumers switched their combined home insurance provider across most household income bands 84
Figure 51: Switching combined cover provider is common across all socio-economic groups 86
Figure 52: Consumers aged between 18 and 29 are the softest acquisition targets contents insurance providers 87
Figure 53: Consumers in the higher income bands are the least loyal to their contents insurance provider 89
Figure 54: AB and C1 consumers are most likely to be attracted to a new contents insurance provider 90
Figure 55: The combined Lloyds Banking Group is the third largest home insurance underwriting group 93
Figure 56: Datamonitor estimates that Lloyds Banking Group is the largest distributor of home insurance under its own brands 95
Figure 57: The UK household insurance market remained highly consolidated in 2007 as the top 10 controlled 65.1% of premiums written 99
Figure 58: Few home insurers ranked 11-20 saw their market share grow in 2007 102
Figure 59: All top 10 property insurers saw their loss ratio increase in 2007 due to the summer floods 105
Figure 60: Lloyds TSB was the only insurer to improve its expense ratio and achieve GWP growth at the same time in 2007 108
Figure 61: All top 10 property insurers saw their combined ratio increase in 2007 110
Figure 62: Household GWP will rise at an average annual rate of 3%, reaching £9 billion in 2013 under the neutral scenario 114
Figure 63: The market is forecast to be profitable for most of the forecast period, under the neutral scenario 116
Figure 64: GWP growth will be lower due to smaller premium rate increases under the pessimistic scenario 119
Figure 65: Under the optimistic scenario GWP is predicted to rise to £9.3 billion in 2013 123
Figure 66: The market is predicted to be profitable throughout the forecast period under the optimistic scenario 125