TABLE OF CONTENTS
CHAPTER 1 EXECUTIVE SUMMARY 3
Introduction 3
Market context 3
Distribution 4
Targeting SME customers 5
Competitive dynamics 6
The future decoded 6
CHAPTER 2 INTRODUCTION 23
What is this report about? 23
Who is the target reader? 24
How to use this report 24
CHAPTER 3 MARKET CONTEXT 25
Introduction 25
Market size 25
The market grew by 24 per cent in 2003, but rates have since softened 25
Commercial property underwriting result 27
The commercial property market was even more profitable in 2003 27
Commercial property claims 30
Claims costs by peril 30
Fire claims numbers increased but there was a decline in the number of large fires 32
Theft claims dropped slightly in 2003 36
Weather claims costs dropped due to the absence of severe weather 37
Business interruption declined as a result of falls in fire and weather claims 38
Market issues 39
The market is softening 39
Fire Service reforms could impact claims costs 41
Climate change will lead to more frequent and serious weather events resulting in increased claims costs 42
Insurers are concerned that Pool Re might not pay out in the event of a terrorist attack 44
CHAPTER 4 DISTRIBUTION 46
Introduction 46
Distribution channel splits 46
Multinational brokers remain the dominant force in commercial insurance distribution 46
The direct channel is slowly gaining market share 50
Company staff and tied agents account for only a small proportion of insurance distribution 51
Banks and building societies aim to increase their share of the commercial insurance market 51
The market share of utilities/retailers/affinity groups remains static 52
Issues affecting distribution 52
imarket is growing in popularity as brokers and insurers seek to interact as efficiently as possible 52
Broker networks are a growing feature of the market 55
CHAPTER 5 TARGETING SME CUSTOMERS 57
Introduction 57
SMEs currently purchase property insurance through brokers and are largely satisfied with their relationships 57
Most SMEs buy their property insurance through a broker 57
Broker satisfaction levels are currently high 58
SMEs have fairly long-term relationships with their brokers 59
The price-sensitivity of SMEs presents opportunities for providers to win business from their competitors 60
Price is the most important factor behind SMEs’ purchase decision 60
The SMEs that have switched provider in the last two years have largely done so on the basis of price 62
Around 20 per cent of SMEs are considering changing their broker in the next 12 months for a cheaper premium 62
Price-based competition in the SME sector is increasing 63
Several insurers and brokers have been increasing their focus in this area 63
Premium rates freeze for over one-third of SMEs 65
Over 10 per cent of SMEs saw a decrease in their property premiums at last renewal 65
Alternative distribution channels could threaten broker dominance if pricing and product offering were right 66
Over 60 per cent of SMEs would consider buying property insurance direct if they were offered a better package 66
Almost 40 per cent of SMEs say they would consider buying insurance from a bank or building society if they got a better deal 69
However, price alone is not enough to win SME customers 70
A significant majority of SMEs would not consider alternative distribution channels regardless of price, as they are content with their existing relationship with their broker and value their expertise 70
Brokers can influence SME purchasing behavior through their reputation and service levels 71
The bancassurance channel faces greater obstacles than the direct channel 73
Additional services are valued by the SMEs that receive them, but there is no real desire for an increase in such services 73
Almost 50 per cent of SMEs receive no additional services from their broker 73
Additional services are currently included as standard 74
The SMEs that do receive additional services find them useful 75
However, the vast majority of SMEs feel no need for any further services from their broker 76
CHAPTER 6 COMPETITIVE DYNAMICS 78
Introduction 78
Top 10 commercial property insurers 78
Zurich FS, NIG and FM Insurance all gained market share in 2003 78
Six players lost market share, including market leader, Norwich Union 79
Market share remained static for Ecclesiastical 79
The top 10 insurers lost market share to players outside the top 20 in 2003 82
Claims ratios of the leading commercial property insurers 84
All top 10 insurers reduced their gross claims ratio in 2003, largely due to robust premium rate increases and benign weather conditions 84
FM Insurance had the lowest gross claims ratio of the top 10 insurers in 2003 87
The unique business model of FM Insurance has led to falling ratios and a pay back plan for its customers 88
Royal & SunAlliance has benefited from lower fire claims and improved risk assessment 90
New Hampshire maintained its low claims ratio in 2003 92
Ecclesiastical’s claims ratio fell in 2003, but the reduction was tempered due to increases in arson attacks on schools and churches 94
NIG combined aggressive premium growth with an improved claims ratio in 2003 96
AXA benefited from a decrease in fire claims during hard market conditions 97
Allianz benefited from the greatest improvement in gross claims ratio of the top 10 insurers in 2003 99
Zurich FS’s claims ratio fell by almost 50 per cent due to the acquisition of good quality risks and a decrease in fire claims in 2003 100
Norwich Union’s gross claims ratio fell marginally between 2002 and 2003 102
NFU Mutual had the highest gross claims ratio of the top 10 insurers due to higher than average fire claims and unprofitable livestock/bloodstock business 103
Lloyd’s market 105
Property premium income at Lloyd’s grew strongly in 2003 105
Competitive issues 106
Several insurers are increasing capacity 106
Insurers are developing their products 107
CHAPTER 7 THE FUTURE DECODED 108
Introduction 108
Forecast commercial property GWP 108
The market will soften until 2007 108
Forecast underwriting result 112
CHAPTER 8 APPENDIX 114
Supplementary data 114
Market context 114
Distribution 115
Acts of terrorism 116
Commercial property GEP by competitor 117
Commercial property market share by competitor 120
Property insurance performance ratios by competitor 122
SME survey tables 139
Brokers dominate the sale of commercial property insurance 139
The price-sensitivity of SMEs presents opportunities for providers to win business from their competitors 141
Price-based competition in the SME sector is increasing 143
Alternative distribution channels could threaten broker dominance if pricing and product offering were right 144
Additional services are valued by the SMEs that receive them, but there is no real desire for an increase in such services 145
Definitions 147
DTI definitions of SME businesses 149
Research methodology 150
Datamonitor’s SME Insurance Survey 150
Explanatory notes to competitor tables 153
Current publications 158
Future publications 158
Do you need more information? 158
Datamonitor Financial Services Consulting 158
SPP writing team 160
How to contact experts in your industry 162
LIST OF TABLES
Table 1: Average premium rate movements, 2004-5 25
Table 2: Commercial property insurance GWP, 1999-2003 26
Table 3: Commercial property insurance underwriting account, 1999-2003 28
Table 4: Commercial property claims, expense and underwriting ratio, 1999-2003 29
Table 5: Commercial property gross incurred claims by peril, 1999-2003 32
Table 6: Total number of property fires in the UK by type, 1998-2003p 33
Table 7: Number and average value of commercial property theft claims, 1999-2003 37
Table 8: Cost of business interruption claims by cause, 1992-2003 39
Table 9: Market share of distribution channels in the commercial general insurance market, 2002-4 49
Table 10: Market share of top 10 commercial property insurers, 1999-2003 82
Table 11: Market share of the top 10 commercial property insurers compared with those ranked 11-20 and those outside the top 20, 1999-2003 83
Table 12: Gross claims ratio and GEP of top 10 commercial property insurers, 2002-3 86
Table 13: Claims incurred, GEP and claims ratio for FM Insurance, 1999-2003 90
Table 14: Claims incurred, GEP and claims ratio for R&SA, 1999-2003 92
Table 15: Claims incurred, GEP and claims ratio for New Hampshire, 1999-2003 93
Table 16: Claims incurred, GEP and claims ratio for Ecclesiastical, 1999-2003 95
Table 17: Claims incurred, GEP and claims ratio for NIG, 1999-2003 97
Table 18: Claims incurred, GEP and claims ratio for AXA, 1999-2003 98
Table 19: Claims incurred, GEP and claims ratio for Allianz, 1999-2003 100
Table 20: Claims incurred, GEP and claims ratio for Zurich FS, 1999-2003 101
Table 21: Claims incurred, GEP and claims ratio for Norwich Union, 2001-2003 103
Table 22: Claims incurred, GEP and claims ratio for NFU Mutual, 1999-2003 104
Table 23: Property GWP split between Lloyd’s and ABI members, 1993-2003e 106
Table 24: Forecast GWP for the commercial property insurance market, 1999-2009f 110
Table 25: Forecast underwriting result for the commercial property insurance market, 2004e-2009f 113
Table 26: Total number of property fires in the UK, split by accidental and malicious, 1996-2001 114
Table 27: Total number of property fires in the UK, by industry, 1996-2001p 115
Table 28: Distribution channel splits 116
Table 29: Commercial property insurance GEP by competitor, 1999-2003 117
Table 30: Commercial property insurance GEP by competitor, 1999-2003, cont. 118
Table 31: Commercial property insurance GEP by competitor, 1999-2003, cont. 119
Table 32: Commercial property insurance market share by competitor, 1999-2003 120
Table 33: Commercial property insurance market share by competitor, 1999-2003, cont. 121
Table 13: Property loss ratio, by competitor, 1999-2003 122
Table 14: Property loss ratio, by competitor, 1999-2003, contd. 123
Table 15: Property loss ratio, by competitor, 1999-2003, contd. 124
Table 16: Property expense ratio, by competitor, 1999-2003 125
Table 17: Property expense ratio, by competitor, 1999-2003, contd. 126
Table 18: Property expense ratio, by competitor, 1999-2003, contd. 127
Table 19: Property combined ratio, by competitor, 1999-2003 128
Table 20: Property combined ratio, by competitor, 1999-2003, contd. 129
Table 21: Property combined ratio, by competitor, 1999-2003, contd. 130
Table 22: Property commission ratio, by competitor, 1999-2003 131
Table 23: Property commission ratio, by competitor, 1999-2003, contd. 132
Table 24: Property commission ratio, by competitor, 1999-2003, contd. 133
Table 25: Property management expenses ratio, by competitor, 1999-2003 134
Table 26: Property management expenses ratio, by competitor, 1999-2003, contd. 135
Table 27: Property management expenses ratio, by competitor, 1999-2003, contd. 136
Table 28: Property net / gross premium ratio, by competitor, 1999-2003 137
Table 29: Property net / gross premium ratio, by competitor, 1999-2003, contd. 138
Table 30: Property net / gross premium ratio, by competitor, 1999-2003, contd. 139
Table 34: Where do you purchase your commercial property insurance from? 139
Table 35: How satisfied are you with your commercial property insurance broker? 140
Table 36: How long have you been with your commercial property insurance broker? 140
Table 37: What were the most important reasons for choosing your current commercial property insurance broker? (multi-choice) 141
Table 38: Could you please rank the reasons for choosing your commercial property broker 141
Table 39: Why have you changed your commercial property insurance broker in the last two years? (multi-choice) 142
Table 40: Do you think you will change your commercial property insurance broker in the next 12 months? 142
Table 41: If yes, why? (multi-choice) 142
Table 42: What is the name of your commercial property insurer? 143
Table 43: Did your commercial property insurance premium change last year? 143
Table 44: If yes, by approximately what percentage? 143
Table 45: Would you consider buying commercial property insurance direct from an insurance company? 144
Table 46: If yes, why? (multi-choice) 144
Table 47: Would you consider buying commercial property insurance from a bank or building society? 144
Table 48: If yes, why? (multi-choice) 145
Table 49: Why would you not consider buying commercial property insurance direct from an insurer? (multi-choice) 145
Table 50: Why would you not consider buying commercial property insurance from a bank or building society? (multi-choice) 145
Table 51: What services do you receive from your current commercial property insurance broker? (multi-choice) 146
Table 52: Do you pay extra for these services? 146
Table 53: Overall, how useful are these services? 146
Table 54: What other services would you like to receive? 147
Table 55: What business sector are you involved in? 152
Table 56: How would you best describe your principal property environment? (multi-choice) 153
Table 57: Methodology for Datamonitor’s property premium income splits 156
LIST OF FIGURES
Figure 1: Commercial property insurance GWP grew strongly between 2001 and 2003 26
Figure 2: The commercial property underwriting result was even more profitable in 2003 27
Figure 3: The underwriting ratio has been profitable since 2001 29
Figure 4: Overall claims costs dropped in 2003 due to a lower bill for weather and fire claims 31
Figure 5: The total number of commercial fires increased marginally in 2003 33
Figure 6: The retail distribution sector is at the highest risk of fire 35
Figure 7: There was a slight decline in the number and average value of theft claims in 2003 36
Figure 8: Business interruption claims resulting from fire and weather damage are volatile but declined in 2003, mirroring overall claims costs for these perils 38
Figure 9: Newer insurers and established players are causing rates to soften 40
Figure 10: Estimates of future costs of weather insurance claims, £m 44
Figure 11: Multinational brokers dominate the distribution of commercial insurance 47
Figure 12: The direct channel leads the alternative distribution channels 48
Figure 13: Brokers dominate the sale of commercial property insurance to SMEs 58
Figure 14: The vast majority of SMEs are satisfied with their broker 59
Figure 15: Many SMEs have been with their broker for over two years 60
Figure 16: SMEs based their choice of broker largely on price 61
Figure 17: The majority of SMEs switch provider to get a cheaper policy 62
Figure 18: Price is the main reason why a fifth of SMEs are planning to change broker in the next 12 months 63
Figure 19: AXA is the leading SME insurer 64
Figure 20: Over one-third of SMEs saw no premium rate change last year because of tough competition in the commercial property insurance market 65
Figure 21: Over 10 per cent of SMEs saw a decrease in their property premiums at last renewal 66
Figure 22: The majority of SMEs would consider buying direct from an insurance company 67
Figure 23: Direct insurers should focus on price competition as well as stressing the terms of the package and superior service 68
Figure 24: Just under 40 per cent of SMEs would consider buying from a bank or building society 69
Figure 25: Banks and building societies wishing to sell commercial property insurance should focus on price, package and service 70
Figure 26: The main barrier to the direct and bancassurance channels is that many SMEs are happy with their existing relationship 71
Figure 27: Service, prior experience and reputation all matter when SMEs are choosing their commercial property insurance broker 72
Figure 28: Many SMEs are currently not receiving any additional services from their commercial property brokers 74
Figure 29: Most additional services are provided as a standard component of the policy 75
Figure 30: Most SMEs find additional services useful 76
Figure 31: Most SMEs feel they don’t need any other additional services 77
Figure 32: Only three insurers gained market share in 2003 80
Figure 33: Norwich Union is the largest player in the UK commercial property market 81
Figure 34: The market share of the top 10 insurers has declined since 1999 83
Figure 35: All top 10 insurers became more profitable in 2003, largely due to the hard market and benign weather conditions 85
Figure 36: FM Insurance achieved the lowest gross claims ratio in 2003 87
Figure 37: FM Insurance’s gross claims ratio has fallen each year between 1999 and 2003 89
Figure 38: R&SA’s gross claims ratio has dropped each year since 2000 91
Figure 39: New Hampshire’s gross claims ratio dropped sharply between 2001 and 2002 and remained low in 2003 93
Figure 40: Ecclesiastical saw its commercial property GEP grow in 2003, while its claims ratio reduced 95
Figure 41: NIG’s aggressive premium rate growth has not affected the continued decline of its claims ratio 96
Figure 42: AXA’s gross claims ratio dropped below 50 per cent in 2003 98
Figure 43: Allianz’s claims ratio fell sharply in 2003 due to a significant reduction in claims incurred 99
Figure 44: Zurich FS’s claims ratio fell in 2003 as claims incurred dropped, while GEP grew significantly 101
Figure 45: Norwich Union’s claims ratio fell marginally in 2003 102
Figure 46: NFU Mutual’s gross claims ratio dropped sharply in 2003 due to a fall in claims incurred 104
Figure 47: Lloyd’s property GWP grew strongly between 2000 and 2003 105
Figure 48: Datamonitor estimates of premium rate reductions, 2004-6 108
Figure 49: The soft cycle began in 2004 due to competitive pressures and will continue until 2007 109
Figure 50: Commercial property forecast assumptions 111
Figure 51: The profitability of the market will begin to dip in 2005 112
Figure 52: Datamonitor’s SME Insurance Survey involves SMEs from a wide array of business sectors 151
Figure 53: Retail is the most common property environment for respondents to Datamonitor’s SME Insurance Survey 152
