UK Home Emergency Insurance 2006

There are two main strategies for offering home emergency insurance. It is either provided free of charge with household insurance as a means to differentiate the household offering, or it is sold as an optional extra on household insurance, and is used as a revenue generator. This report analyzes these two strategies, and their influence on the future growth of the market.

Report Highlights

Interviews with industry executives suggest that the highest penetration rate that insurance providers have currently achieved selling home emergency insurance as an optional extra on household insurance is around 30 per cent. Many books are currently smaller than that and there is therefore room for growth in the market.

Four of the top 10 home insurers provide home emergency insurance free of charge on all or some of their home insurance policies, according to a mystery shopping exercise conducted by Datamonitor in March 2006. These are Royal & Sun Alliance, Legal & General, Zurich FS and AXA.

Because most policies are sold in connection with the sale of a home insurance policy, direct price competition is not a problem in this line of business. This is reflected in the variations in price, which range from £2 to £7 a month.
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CHAPTER 1 EXECUTIVE SUMMARY 3
Introduction 3
Market context 3
There are several forms of home emergency cover 3
Home emergency insurance is largely provided in combination with home insurance and two main strategies for the product are evident 3
Many insurers provide home emergency insurance as a standard part of their home insurance, using it as a form of product differentiation 3
Other providers sell the cover as an optional extra on home insurance, using it as a revenue generator 4
Home emergency premium rates vary considerably from £2 to £7 a month 4
It is estimated that there are over 3 million policies in force, though only between 1.2 and 1.3 million of these policies are paid for 4
Competitive dynamics 5
Most of the top 10 home insurers offer home emergency, but cover is less common among mid-sized home insurers 5
There is little to no direct competition in the home emergency market 7
Competition to home emergency comes from substitute products, such as home service and single utility emergency cover, supplied by utility companies 8
The future decoded 8
Two separate strategies are likely to shape growth in the home emergency market in the near future 8
As competition heats up in the household insurance market, offering home emergency as standard could be increasingly used as a differentiation tool 8
Selling the product as an optional extra will lead to an increase in penetration rate 8
However, factors such as a rise in Internet sales and the threat from substitute products will limit growth in the sale of home emergency insurance 9
CHAPTER 2 INTRODUCTION 19
What is this report about? 19
Who is the target reader? 19
How to use this report 20
CHAPTER 3 MARKET CONTEXT 21
Introduction 21
There are several forms of home emergency cover 21
Home emergency insurance is largely provided in combination with home insurance and two main strategies for the product are evident 25
Many insurers provide home emergency insurance as a standard part of their home insurance, using it as a form of product differentiation 25
Other providers sell the cover as an optional extra on home insurance, using it as a revenue generator 25
Stand-alone home emergency insurance is not as successful as cross selling 26
Face-to-face or personal contact plays an important role in the sale of home emergency insurance 26
Home emergency premium rates vary considerably from £2 to £7 a month 26
It is estimated that there are over 3 million policies in force, though only between 1.2 and 1.3 million of these policies are paid for 29
Home emergency is a profitable line, due to low claims frequency 31
Lack of price-based competition allows providers to price the product profitably 31
Profitability is also helped by a low claims frequency, though claims frequency is linked to unpredictable weather conditions 32
Only some weather claims are likely to lead to an increase in the number of home emergency claims 33
CHAPTER 4 COMPETITIVE DYNAMICS 36
Introduction 36
The top household insurers, as well as the top banks, are the main providers of home emergency insurance 36
Most of the top 10 home insurers offer home emergency, but cover is less common among mid-sized home insurers 36
Many banks also offer home emergency insurance, but the product is less common among brandassurers 39
There is little to no direct competition in the home emergency market 39
The main battlefield and driving force of the home emergency market is the highly competitive household insurance market 39
A number of developments in the household insurance market are influencing the home emergency market 40
The household insurance market saw increased competition in 2005, which drove down premium rates 40
The increased commoditization of household insurance and changing distribution channels raises the intensity of price-based competition 43
Direct distribution channels, especially the phone and the Internet, are growing in favor with consumers 43
As Homeserve provides home emergency services for insurance providers, there is no room for product differentiation 44
Inter Partner Assistance partners with Homeserve and underwrites many insurance providers' home emergency policies 44
Competition to home emergency comes from substitute products, such as home service and single utility emergency cover, supplied by utility companies 46
British Gas dominates the home service market, while other utility companies offer single utility emergency products 46
Advertising is dominated by Homeserve and British Gas, which will impact consumer perception of the product 49
British Gas and Homeserve account for 78 per cent of the £19 million spent on advertising in 2005 49
Direct mail is the most popular advertising medium due to its cost-efficiency and the role of home emergency as a cross-sold product 51
Because of the costs involved it is not feasible for insurance providers to advertize home emergency insurance on television 53
Press advertising is a cheaper way of building public awareness than television advertising, and is used by several competitors for this reason 54
CHAPTER 5 THE FUTURE DECODED 57
Introduction 57
The number of households in the UK is increasing, leading to a small increase in the number of potential home emergency customers 57
Two separate strategies are likely to shape growth in the home emergency market in the near future 58
As competition heats up in the household insurance market, offering home emergency as standard could be increasingly used as a differentiation tool 58
Up-selling and cross-selling will lead to an increase in penetration rate, especially for providers that currently have low penetration 58
However, factors such as a rise in Internet sales and the threat from substitute products will limit growth in the sale of home emergency insurance 61
Changes in distribution trends for home insurance will limit the growth potential of home emergency insurance, as online sales increase at the expense of face-to-face sales 61
Low consumer awareness and substitute products will continue to limit growth 64
CHAPTER 6 APPENDIX 65
Supplementary data 65
Definitions 67
Definitions of general terms 67
Definitions of terms specific to this report 67
Research methodology 68
Future readings 69
Relevant links 70
Do you need more information? 70
Datamonitor Financial Services Consulting 70
Datamonitor's custom research capabilities 70
SPP writing team 71
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Table 1: The results of Datamonitor's home emergency mystery shopping exercise, March 2006 28
Table 2: Home emergency insurance premium rates, March 2006 29
Table 3: Datamonitor estimates of the size of the home emergency market in policy numbers and GWP, 2005 31
Table 4: Gross claims incurred in the household market, by peril, 1999-2004 33
Table 5: Proportion of household claims by peril, 1999-2004 33
Table 6: Weather damage claims incurred by cause in household insurance, 1999-2004 35
Table 7: The top 20 household insurers' home emergency insurance offerings, market share as part of group and as part of entire household insurance market 38
Table 8: Change in UK household insurance premiums, January 2006 - April 2006 41
Table 9: Change in UK household insurance premiums, 1999-2005 42
Table 10: Examples of partnership deals in the home emergency market, which is dominated by Inter Partner Assistance, the underwriting partner of Homeserve 45
Table 11: Examples of cover offered by utility companies, March 2006 49
Table 12: Competitors' advertising spend on home emergency insurance by medium, 2005 51
Table 13: Advertising spend on direct mail for home emergency insurance by competitor, 2005 53
Table 14: Competitors' advertising spend on TV for home emergency insurance, 2005 54
Table 15: Competitors' advertising spend on press for home emergency insurance, 2005 56
Table 16: Reasons for choosing household insurance policy, split according to method used to arrange cover (2005) 63
Table 17: Platform used to arrange household insurance, 1999-2005 64
Table 18: The size of UK households by the number of people, 1971-2004 66
Table 19: Tenure structure in UK households, 1994-2004p 66


Figure 1: Around 13 per cent of UK households currently have home emergency insurance, though only 5 per cent pay for it 5
Figure 2: While most of the top 10 household insurers offer home emergency insurance in some form, almost half of those ranked 11-20 do not offer it 7
Figure 3: An example of the way in which home emergency insurance is described by an insurance provider 22
Figure 4: British Gas's Homecare range is an example of home service cover 23
Figure 5: EDF energy offers electrical emergency cover as a single utility product 24
Figure 6: Standalone policies are often more expensive than policies sold as optional extras on household insurance policies 27
Figure 7: Around 13 per cent of UK households currently have home emergency insurance, though only 5 per cent pay for it 30
Figure 8: The percentage of household insurance claims made up of weather claims varies, depending on weather conditions 32
Figure 9: The proportion of weather damage claims made up of burst pipes varies from year to year, depending on how cold the winter has been 34
Figure 10: While most of the top 10 household insurers offer home emergency insurance in some form, almost half of those ranked 11-20 do not offer it 37
Figure 11: More Th>n uses the fact that home emergency cover is included as standard in its home insurance offering as a product differentiator 40
Figure 12: There has been a noticeable drop in buildings premium rates since 2004 42
Figure 13: South East Water offers plumbing and gas central heating cover 47
Figure 14: Gas supply pipe cover is one of NPower's offerings 48
Figure 15: British Gas and Homeserve are the biggest spenders on advertising for home emergency insurance 50
Figure 16: Homeserve spent by far the most on direct mail advertising for home emergency insurance in 2005 52
Figure 17: Only three companies advertise home emergency insurance on television, and of these British Gas spends by far the most 54
Figure 18: British Gas and Direct Line use the press the most for advertising home emergency insurance 55
Figure 19: Industry executives have varied expectations for growth 60
Figure 20: Home emergency insurance is not a mainstream offering, and many household insurance providers do not offer it 61
Figure 21: A cheaper quote is far more important to those purchasing household insurance via direct platforms than those purchasing face-to-face 62
Figure 22: The influence of the phone and the Internet have increased at the expense of face-to-face distribution in the household market 63
Figure 23: The total number of households continued to grow, while the average household size stayed level in 2004 65
Figure 24: Datamonitor's core consulting capabilities 71
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