UK Household Insurance 2005

Comprehensive coverage of the UK household insurance market



Report Highlights
In 2004 household GWP increased relatively slowly, indicating that the household insurance market is approaching a soft cycle. Insurers were unable to justify strong rate increases given the lack of extreme weather events. In addition, premium rates, and hence GWP, have both been put under downward pressure by increased competition.

In the 12 months between 2004 and 2005, statistics on consumer behaviour indicate that there was a noticeable shift in distribution splits. Direct platforms have continued to grow in popularity, and the Internet recorded the strongest growth of any medium. Whilst it only accounts for a small proportion of sales, it is evidently gathering momentum.

While many competitors in the home insurance market recorded strong growth in 2004, the greatest increases were made by two of the smallest players, UK Insurance and St. Andrews. They increased their share enough to push Co-operative out of the top ten, whilst the market leaders Norwich Union and Royal and SunAlliance both lost market share.
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CHAPTER 1 EXECUTIVE SUMMARY 3
Market Context 3
The domestic property market recorded slight growth in 2004 3
The household market broke into a profit 3
Total domestic claims costs fell by over a quarter in 2004 3
The cost of flood-related claims could rise 15-fold by 2080, due to the changing climate 3
Customer Focus 4
Bancassurers have lost ground in the household market to corporate partnerships and direct writers 4
The Internet is growing in prominence as a platform for selling household insurance, but Internet consumers lack loyalty 4
Price and ease are the consumer’s main considerations when choosing a home insurance policy 4
Advertising has become very important to insurers as a means of reaching potential customers, and techniques used are diversifying 4
Competitive Dynamics 5
The competitive structure of the household market shifted in 2004, and as the HBOS account exchanged hands, the top 10 rankings were affected 5
Churchill sustained a high growth rate again in 2004, while Norwich Union and Royal & SunAlliance lost market share 5
Future Decoded 5
While the market is expected to grow in 2005–6, there is a consensus that, in the longer-term, rates are bound to fall 5
CHAPTER 2 INTRODUCTION 20
What is this report about? 20
Who is the target reader? 20
How to use this report 21
CHAPTER 3 MARKET CONTEXT 22
Introduction 22
The domestic property market grew in 2004, however the market softened in 2005 22
Demand for household insurance continues to grow 22
The household market grew faster than the private motor market, but slower than the accident and health sector 24
In 2004 household GWP increased relatively slowly 26
Buildings and contents GWP each grew by around 2.5 per cent in 2004 27
Premium rates increased in 2004, but declined in the first half of 2005 28
The property insurance market recorded a very strong result, driven by profits in the domestic and commercial market 30
The total property market recorded an impressive underwriting performance 30
The commercial market is more profitable than the domestic market 32
The household market broke into a profit in 2004 33
Reinsurance ceded leveled off in 2004 36
Claims costs dropped in 2004, largely due to reduced weather claims 39
Total domestic claims costs fell by over a quarter in 2004 39
The trend towards fewer theft claims continues, leading to lower theft claims costs 41
Fire claim costs showed a small fall 47
Claims resulting from weather damage fell sharply in 2004 48
Subsidence claims normalized, following the highs seen in 2003 49
Claims costs rose sharply in the first half of 2005, due to the storms experienced in the north of England 51
Carlisle was hit by serious floods 51
Weather claims costs spiked in the first quarter of 2005 51
Climate change is forecast to drive up flood claims in the UK, however the government can take measures to reduce these costs 53
The cost of flood related claims could rise 15-fold by 2080, due to the changing climate 53
While the UK cannot control global CO2 emissions, the government can mitigate the costs of climate change 54
However, if action is taken to reduce climate change now, emissions could be reduced significantly 56
Better preparation is needed if insurers are to cope with increasing risks of weather damage 56
Insurers are continuing to target the classic niche markets such as High Net Worth but are also looking to other emerging sectors 57
Mid Net Worth insurance is becoming more competitive 57
High Net Worth insurance offers better service and higher sums insured 58
Young professionals are seen as the future HNW individuals 58
Insurers are looking to capitalize on the buy-to-let boom 59
CHAPTER 4 CUSTOMER FOCUS 61
Introduction 61
Bancassurers have lost ground in the household market to corporate partnerships and direct writers 61
The Internet is growing in prominence as a platform for selling household insurance, but Internet consumers lack loyalty 63
Direct distribution channels, especially the phone and the Internet, are growing in favor with consumers 63
Price and ease are the consumer’s main considerations when choosing a home insurance policy 65
On the phone and the Internet consumers focus on price, while in face-to-face situations, other factors influence their decisions 67
Consumer retention in the household insurance market stood at 85 per cent in 2005 69
Internet customers are much more likely than others to resolicit business and change their provider 70
Advertising expenditure is boosting consumer recognition of some of the major providers in the market 72
As competition in the household market increases and direct channels grow, providers are using advertising to build brand awareness 74
Lloyds TSB was the number one advertiser of combined buildings and contents insurance in 2004 74
A diverse range of mediums is being used by providers to reach potential customers 78
Banks and building societies dominate the advertising of contents insurance 79
CHAPTER 5 COMPETITIVE DYNAMICS 83
Introduction 83
The competitive structure of the household market changed in 2004 83
2004 was a good year for many in the top 10, yet their overall market share declined 83
Top 10 rankings see a big change as the HBOS household book changes hands 83
Churchill sustained a high growth rate again in 2004, while Norwich Union and Royal & SunAlliance lost market share 86
Analysis of performance by competitor in 2004 88
Banks and building societies and retailers are focusing on household 95
HBOS continued to expand into the household insurance market in 2005 95
Interest in the market among retailers has increased, with Asda in particular voicing ambitions to increase policyholder numbers 95
Barclays has redesigned its home insurance policies in order to launch itself into the market 95
Loss and expense ratios improved for household insurers in 2004 leading to better overall combined ratios 96
The loss ratio of the top 20 household insurers decreased by 4.4 percentage points in 2004 96
The expense ratio of the top 20 household insurers dropped marginally in 2004 99
The combined ratio of the top 20 property insurers fell by nearly five percentage points as operating conditions improved 102
CHAPTER 6 THE FUTURE DECODED 106
Introduction 106
While the market is expected to grow in 2006, there is a consensus that, in the medium term, rates are bound to fall 106
Interviews with leading household managers showed a range of experiences in 2005 106
The level of price-based competition could increase in coming years 106
Scenario 1 paints a positive picture of the market and assumes marginal rate reductions in 2007 and 2008, yet the market remains in an underwriting profit 107
GWP declines marginally in 2007 and 2008, but rates harden again in 2009–10 109
The household insurance market remains profitable between 2005 and 2010 110
Scenario 2 is more pessimistic and assumes more aggressive competition in 2007 and 2008, resulting in underwriting losses 112
Aggressive price-cutting leads to steep falls in GWP in 2007 and 2008 114
Decline in GWP impacts on profitability, and as a result the market makes an underwriting loss in 2008 115
CHAPTER 7 APPENDIX 118
Supplementary data 118
GEP and performance ratio data by competitor 118
Definitions 118
Definitions of general terms 118
Research methodology 119
Distribution estimates and forecast methodology 119
Ipsos MORI data 120
Explanatory notes to competitor tables 122
Relevant links 126
Research sources 126
Current publications 126
Future publications 127
Datamonitor’s custom research capabilities 127
SPP writing team 128
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Table 1: The size of UK households by the number of people, 1971–2004 23
Table 2: Tenure structure in UK households, 1994–2004p 24
Table 3: Personal insurance market GWP by sector, 1999–2004 25
Table 4: Annual growth in household insurance market GWP, 1999–2004 27
Table 5: GWP split in household insurance between buildings and contents cover, 2000–4 28
Table 6: Change in UK household insurance premiums, 1999–2005 30
Table 7: Total property underwriting account, 1994–2004 31
Table 8: Breakdown of property insurance market underwriting results, 2000–4 32
Table 9: Household and commercial property underwriting results, 2000–4 33
Table 10: Breakdown of household underwriting result, 2000–4 35
Table 11: Household insurance commissions and expenses compared with GWP and total outgoings, 2000–4 36
Table 12: Domestic reinsurance ceded compared with NWP and GWP, 2000–4 38
Table 13: Reinsurers’ share of claims, 2000–4 38
Table 14: Gross claims incurred in the household market, by peril, 1999–2004 40
Table 15: Proportion of household claims by peril, 1999–2004 41
Table 16: The cost of household theft claims and average claim cost, 1999–2004 42
Table 17: Number of burglaries in England and Wales, 1997–2005 44
Table 18: Unemployment among 18–24-year-old males, 1996–2005 44
Table 19: Household types most at risk from burglary, 2003/4–2004/5 46
Table 20: Gross incurred household fire claims, 1999–2004 48
Table 21: Weather damage claims incurred by cause in domestic property, 1999–2004 49
Table 22: Average subsidence claim payout compared to total claims and number of subsidence claims, 1999–2004 50
Table 23: Household claims by major peril, by quarter, 2001–Q2 2005 53
Table 24: Distribution of household insurance, 2000–4 63
Table 25: Platform used to arrange household insurance, 1999-2005 65
Table 26: Reasons for choosing household insurance provider, 2005 67
Table 27: Reasons for choosing household insurance policy, split according to method used to arrange cover (2005) 68
Table 28: Percentage of consumers switching household insurance provider at last renewal, 2005 70
Table 29: Percentage of consumers switching household insurance provider at last renewal, split by platform used to arrange insurance, 2005 72
Table 30: Spontaneous consumer awareness of household insurers against advertising expenditure, 2004/5 74
Table 31: Advertising spend on combined buildings and contents insurance, 2003–4 77
Table 32: Buildings and contents advertising spend by medium by competitor, 2004 79
Table 33: Advertising spending on contents insurance by competitor, 2004 81
Table 34: Advertising spend on contents insurance by medium by competitor, 2004 82
Table 35: Market share of the top 10 household insurers, 2003–4 86
Table 36: Growth of the top 10 household insurers, 2003–4 88
Table 37: Household GEP compared with total property loss ratio, top 20 domestic insurers, 2003–4 99
Table 38: Total property expense ratio and annual change, top 20 household insurers, 2003–4 102
Table 39: Total property combined ratio compared with household GEP as a proportion of total property GEP, 2003–4 105
Table 40: Scenario 1: Forecast underwriting result, 1996–2010f 110
Table 41: Scenario 1: Forecast underwriting result, 1996–2010f 112
Table 42: Scenario 2: Household insurance GWP, 1993–2010f 115
Table 43: Scenario 2: Forecast underwriting result, 1996–2010f 117
Table 44: Methodology for Datamonitor’s property premium income splits 124




Figure 1: The total number of households continued to grow, while the average household size stayed level in 2004 23
Figure 2: In 2004, private motor tailed off while household GWP sustained growth 25
Figure 3: In 2004 the household GWP annual growth rate recorded its lowest result since 1999 26
Figure 4: Both buildings and contents GWP showed growth in 2004 28
Figure 5: There has been a noticeable drop in buildings premium rates since 2004 29
Figure 6: The property market continued to achieve strong underwriting results in 2004 31
Figure 7: The gap between commercial and household underwriting results has narrowed in 2004 33
Figure 8: The household market’s underwriting performance improved, while NWP recorded slight growth 34
Figure 9: GWP and commissions were both on an upward trend, while claims incurred tailed off slightly 36
Figure 10: Household reinsurance ceded remained steady in 2004 after the rise in 2003 37
Figure 11: Theft became the greatest peril behind gross claims incurred in the household market in 2004 40
Figure 12: The number of theft claims declined again in 2004, but the average cost increased 42
Figure 13: The number of burglaries in England and Wales fell significantly in 2004–5 43
Figure 14: Not having security measures places home owners at a much greater risk of burglary 46
Figure 15: There was a small decline in domestic fires in 2004 47
Figure 16: Claims costs due to storm damage rose in 2004 48
Figure 17: Gross incurred subsidence claims fell in 2004 50
Figure 18: Weather claims rose steeply in the first quarter of 2005 52
Figure 19: Direct distribution and the rise of corporate partnerships have eroded bancassurers’ role in the sale of household insurance 62
Figure 20: The influence of the phone and the Internet have increased at the expense of face-to-face distribution in the household market 64
Figure 21: In 2005, almost a third of consumers chose their home insurance policy because they were offered a cheaper quote 66
Figure 22: A cheaper quote is far more important to those purchasing via the direct platforms than those purchasing face-to-face 68
Figure 23: 85 per cent of consumers stayed with their household insurance provider in 2005 69
Figure 24: Retention rates are much lower among customers who have arranged insurance via the Internet 71
Figure 25: Direct Line was well recognized by consumers, and it spent heavily on advertising in 2004 73
Figure 26: Lloyds TSB spent more on advertising combined buildings and contents insurance than other providers in 2004 76
Figure 27: Halifax spent more than any other provider advertising contents insurance in 2004 80
Figure 28: The two biggest players in the UK household insurance market both saw their market share decline 84
Figure 29: Norwich Union regained its position as market leader in 2004, despite recording a decline in market share 85
Figure 30: Churchill recorded strong growth rates again in 2004 87
Figure 31: Change in GEP compared with change in loss ratio, top 20 household insurers, 2003–4 98
Figure 32: Change in GEP compared with change in expense ratio, top 20 household insurers, 2003–4 101
Figure 33: Total property combined ratio compared with change in household GEP, top 20 household insurers, 2003–4 104
Figure 34: Scenario 1: Key variables affecting household GWP, 2005e–10f 108
Figure 35: Scenario 1: GWP falls marginally in 2007 and 2008 but picks up again between 2009 and 2010 109
Figure 36: Scenario 1: The household insurance market continues to make an underwriting profit between 2005 and 2010 111
Figure 37: Scenario 2: Key variables affecting household GWP, 2005e–10f 113
Figure 38: Scenario 2: The household insurance market experiences aggressive price competition in 2007 and 2008 114
Figure 39: Scenario 2: The household insurance market records an underwriting loss between 2007 and 2010 116
Figure 40: Datamonitor’s core consulting capabilities 128
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