UK Household Insurance 2006

This report is an indispensable guide to the UK household insurance market. It offers a comprehensive analysis of this sector incorporating market sizing information, consumer analysis, competitor market share data and forecasts of future growth and profitability.

Market size and underwriting profitability data Insight into customer behavior within this important sector Forecasts of market size and profitability until 2011

Report Highlights


Direct Line was the most widely recognized home insurance provider in 2006. Its distinctive logo and advertising campaigns have lodged firmly in the minds of consumers. However, Norwich Union Direct overtook Churchill as the second most widely recognized insurer. Recent years have seen important changes to the way household insurance is being sold, as sales from banks and building societies and brokers have tailed off as a result of increased competition from corporate partnerships and direct writers. The household insurance market improved its underwriting result for a fifth consecutive year in 2005, following a loss of £432 million in 2000.
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CHAPTER 1 EXECUTIVE SUMMARY 3
Both household GWP and the household underwriting result improved in 2005 3
Household GWP growth improved in 2005 3
The household insurance underwriting result rose in 2005, as growth in NWP outstripped total outgoings 3
Corporate partnerships increased their market share of household insurance distribution in 2005, while price remains the biggest motivator for consumers 4
The share of bancassurers and direct writers stagnated in the household insurance market in 2005, while corportate partnerships continued to rise 4
Bancassurers and brokers have lost ground in the household market in recent years, but this decline has slowed 4
A cheaper quote was by far the most popular reason for choosing a home insurance policy in 2006 5
Norwich Union saw a strong increase in household insurance premium income in 2005, while combined ratios improved 5
Norwich Union recorded strong premium income growth in 2005, as Churchill's rapid expansion faltered 5
The combined ratio of the top 20 property insurers fell marginally by 0.4 per cent in 2005, driven by the performance of just under half of this peer group 6
11 of the top 20 property insurers recorded an increase in combined ratio 6
While competition placed downward pressure on premiums in 2006, rates are generally expected to harden in 2007 and 2008 6
Many household insurers stated that premium rates declined in 2006 6
A number of household insurers are expecting operating conditions to improve in 2007 and 2008 7
CHAPTER 2 INTRODUCTION 21
What is this report about? 21
Who is the target reader? 21
How to use this report 22
CHAPTER 3 MARKET CONTEXT 23
Introduction 23
The number of UK households rose in 2005 and is forecast to continue growing in the next 20 years 23
The number of UK households rose in 2005 23
Population growth has led to an increase in the number of UK households 23
A decline in average household sizes is also driving growth 23
Government projections suggest strong growth in the number of households between 2006 and 2026 25
There has been significant growth in the private rental market 27
The household insurance market saw growth improve in 2005, however increased competition has placed pressure on rates in 2006 28
Household insurance GWP rose by 4.8 per cent in 2005 28
Household GWP growth improved in 2005 30
GWP growth was stronger for contents insurance than for buildings insurance in 2005 32
Competition continued to put downward pressure on contents cover in 2006, but buildings rates increased 33
Prices are being driven down by premium discounting and price matching 33
New entrants have also put pressure on rates 33
Providers have been much better at forcing through increases on building rates 34
Household underwriting profitability increased in 2005 while profits in the overall property market dipped 35
Property underwriting profits fell slightly in 2005, as the effect of increased competition began to have an impact 35
Profitability declined as growth in total outgoings outstripped growth in NWP 35
The household insurance underwriting result rose in 2005, as growth in NWP outstripped total outgoings 37
Commissions and expenses and reinsurance ceded both increased marginally in 2005 39
Commissions and expenses increased by only 1.1 per cent in 2005 39
Reinsurance ceded increased slightly in 2005 40
Household claims incurred rose in 2005, as weather costs normalized and fire costs increased 42
Household insurance claims costs rose by 17.4 per cent in 2005 42
Weather claims costs rose by 54.5 per cent in 2005, reflecting poor weather conditions 44
The household insurance market saw fire claims costs rise by almost ten per cent, however losses were far worse in the commercial property sector 46
Household insurance theft claims declined by 5.9 per cent in 2005 47
The number of burglaries fell by 3 per cent in 2005/6 49
The risk of burglary is heavily influenced by factors such as tenancy status and security measures 50
Although subsidence remained the smallest of the main four perils, claims costs rose by 13.1 per cent in 2005 52
CHAPTER 4 CUSTOMER FOCUS 54
Introduction 54
The corporate partnership channel increased its share of the household market in 2005 while face-to-face sales slowed 54
The share of bancassurers and direct writers stagnated in the household insurance market in 2005, while corportate partnerships continued to rise 54
Bancassurers and brokers have lost ground in the household market in recent years, but this decline has slowed 54
The rise of direct writers stagnated in 2005, though corporate partnerships continued to rise 55
The proportion of household insurance arranged by phone and on the Internet continues to increase at the expense of face-to-face sales 57
The majority of consumers are attracted by low quotes, while those buying online are more promiscuous 59
A cheaper quote was by far the most popular reason for choosing a home insurance policy in 2006 59
Online household insurance consumers are more than twice as likely to switch provider than those who purchase face-to-face or by telephone 61
Household insurance consumers that buy over the telephone are more likely to be influenced by reputation and recommendation than consumers who purchase face-to-face or online 63
Advertising for buildings and contents insurance is dominated by direct insurers advertising via direct mail and television, with Direct Line being the most recognized insurer 65
Direct Line was the most widely recognized household insurance provider in 2005 65
Total spend on advertising for buildings and contents insurance increased in 2005 67
The top 10 advertisers account for over 80 per cent of the total spend 67
The top 10 advertise mainly by direct mail, but for some television advertising also plays an important role 70
Advertising for contents only insurance is dominated by insurers and bancassurers that advertise via direct mail 72
Spending on contents insurance significantly increased in 2005, but is still much smaller than spending on buildings and contents insurance 72
The top 10 contents insurance advertisers include several banks 72
The top 10 contents advertisers focus on direct mail, though television advertising is important for some players 74
CHAPTER 5 COMPETITIVE DYNAMICS 76
Introduction 76
The top 10 household insurers saw their fortunes diverge in 2005 in terms of premium income growth 76
Market leader Norwich Union recorded high premium income growth 76
Royal & SunAlliance avoided price-based competition and it saw GWP decline as a result 77
Churchill lost momentum in 2005, and it saw a marginal GWP decline 78
St. Andrew's continued to record prolific growth as HBOS gave it more business to underwrite 79
Lloyds TSB saw a very slight decline in household premiums in 2005 79
Zurich was just able to sustain premium income growth, partly through deals with brokers and partners 80
Direct Line has benefited from growth in phone and Internet distribution, and by the product commoditization that this has encouraged 80
Corporate partnerships helped AXA to achieve an impressive increase in GWP 81
Legal & General divested itself of Gresham, but suffered high claims costs in 2005 81
UK Insurance's premium income remained virtually flat 82
Norwich Union recorded strong premium income growth in 2005, as Churchill's rapid expansion faltered 84
Property insurance operating conditions improved slightly in 2005, although many players saw their combined ratios increase 86
The loss ratio of the top 20 property insurers improved in 2005 86
Nine of the top 20 actually recorded an increase in loss ratio, with significant increases from several players 86
Ecclesiastical, Direct Line and Allianz all recorded large loss ratio increases 87
St. Andrew's and Norwich Union all achieved big reductions in loss ratio, going against the market trend of rising claims costs 88
Liverpool Victoria's loss ratio was the worst of the property sector's top 20 players 88
The expense ratio of the top 20 property insurers increased by 1.8 percentage points in 2005 90
Direct writers and mutual insurance companies had the best expense ratios 91
CIS, Royal & SunAlliance and Zurich all saw significant increases in expense ratios 91
Lloyds TSB and NIG achieved large reductions in their expense ratios 92
The combined ratio of the top 20 property insurers fell marginally by 0.4 per cent in 2005, driven by the performance of just under half of this peer group 94
11 of the top 20 property insurers recorded an increase in combined ratio 95
Reflecting softer market conditions, Legal & General moved into an underwriting loss 95
Direct Line, Allianz and Ecclesiastical saw the biggest increase in combined ratio 95
Lloyds TSB, St. Andrew's and Norwich Union all achieved double digit figure combined ratio reductions 96
CHAPTER 6 THE FUTURE DECODED 98
Introduction 98
While competition placed downward pressure on premiums in 2006, rates are generally expected to harden in 2007 and 2008 98
Many household insurers stated that premium rates declined in 2006 98
A number of household insurers are expecting operating conditions to improve in 2007 and 2008 98
In scenario 1 GWP growth occurs slowly between 2007 and 2008 as competition is high, however stronger growth is recorded after 2009 99
Competition remains high during 2007 and 2008, due to favorable market conditions and changing product distribution 99
High levels of competition initially ensure that GWP growth is slow 101
Slow NWP growth causes the household underwriting result to fall between 2006 and 2008, however profitability subsequently increases 102
In scenario 2 competition is less intense, leading the market to achieve stronger GWP growth and better underwriting profits 104
Stronger GWP growth is achieved as competitors refrain from price-based competition 104
The household market reaches £9 billion in GWP by 2011 106
The market achieves strong underwriting profitability between 2006 and 2011 107
In scenario 3 competition is intense and as a result the market moves into a loss in 2007 109
Competition is high in 2007 and 2008, and leads to further declines in premium rates 109
Household GWP declines in 2006 and 2007, although conditions improve during 2008 111
The household insurance market moves into an underwriting loss in 2007 112
CHAPTER 7 APPENDIX 115
Supplementary data 115
GEP and performance ratio data by competitor 115
Definitions 115
Competitor data 115
GWP versus GEP reporting 115
2005 definitions for lines of business 116
Household and domestic all risks 116
Pre-2005 definitions for lines of business 117
Property 117
Premium income measures 119
Earned premiums 119
Gross Premium 119
Net Premium 119
Written premiums 119
Research methodology 119
Ipsos MORI data 119
Sample design 120
Current readings 120
Future readings 121
Datamonitor's custom research capabilities 121
SPP writing team 122

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Table 1: The size of UK households by the number of people, 1971-2005 25
Table 2: Household projections in England by household type, 2003-2026 26
Table 3: Trends in household tenure for England, 1995-2005 28
Table 4: Personal insurance market GWP by sector, 2001-2005 30
Table 5: Annual growth in household insurance market GWP, 2000-5 31
Table 6: GWP split in household insurance between buildings and contents cover, 2001-5 33
Table 7: Change in UK household insurance premiums, 2000-6 35
Table 8: Property underwriting account, 1995-2005 36
Table 9: Household underwriting account, 1995-2005 38
Table 10: Household insurance commissions and expenses compared with GWP and total outgoings, 2001-5 40
Table 11: Domestic reinsurance ceded compared with NWP and GWP, 2001-5 41
Table 12: Reinsurers' share of claims, 2001-5 42
Table 13: Gross claims incurred in the household market, by peril, 2000-5 43
Table 14: Proportion of household claims by peril, 2000-5 44
Table 15: Weather damage claims incurred by cause in domestic property, 2000-5 45
Table 16: Gross incurred household fire claims, 2000-5 47
Table 17: The cost of household theft claims and average claim cost, 2000-5 48
Table 18: Number of burglaries in England and Wales, 1999-2006 50
Table 19: Unemployment among 18-24 year old males, 1998-2006 50
Table 20: Household types most at risk from burglary, 2004/5 - 2005/6 52
Table 21: Average subsidence claim payout compared to total claims and number of subsistence claims, 2000-5 53
Table 22: Distribution of household insurance, 2001-5 56
Table 23: Distribution of household insurance, by platform, 2001-6 58
Table 24: Reasons for choosing household insurance provider, 2006 60
Table 25: Propensity to switch household provider and likelihood of getting other quotes, by distribution platform, 2006 63
Table 26: Motivations for taking out a new household insurance policy, by distribution platform, 2006 65
Table 27: Spontaneous consumer awareness of household insurers against advertising expenditure, 2006 67
Table 28: Top 10 advertisers, buildings and contents, 2004-5 70
Table 29: Top 10 advertisers' spend by media, buildings and contents, 2005 71
Table 30: Top 10 advertisers, contents, 2004-5 74
Table 31: Top 10 advertisers' spend by media, contents, 2005 75
Table 32: Market share of the top household insurers, 2004-5 84
Table 33: Growth of the top 10 household insurers, 2004-5 86
Table 34: Premium income compared to loss ratio, top 20 property insurers, 2004-5 90
Table 35: Expense ratio of the top 20 property insurers, 2004-5 94
Table 36: Premium income compared to combined ratio, top 20 property insurers, 2004-5 97
Table 37: Scenario 1: Household insurance GWP, 1994-2011f 102
Table 38: Scenario 1: Forecast underwriting result, 1997-2011f 104
Table 39: Scenario 2: Household insurance GWP, 1994-2011f 107
Table 40: Scenario 2: Forecast underwriting result, 1997-2011f 109
Table 41: Scenario 3: Household insurance GWP, 1994-2011f 112
Table 42: Scenario 3: Forecast underwriting result, 1997-2011f 114


Figure 1: The number of UK households continues to grow, while the average household size has fallen 24
Figure 2: Government projections estimate that the number of households will continue to grow in the next 20 years 26
Figure 3: Social renting is on the decline at the expense of private renting and owner occupation 27
Figure 4: Household and individual accident and health recorded GWP growth, while private motor declined again in 2005 29
Figure 5: Household GWP growth picked up slightly in 2005 31
Figure 6: Both buildings and contents GWP recovered from a spell of slower growth in 2004 32
Figure 7: Buildings insurance premiums recovered in 2006, however competition continued to drive contents premiums down 34
Figure 8: Profits fell slightly in 2005, as the effect of increased competition began to have an impact 36
Figure 9: The household insurance market recorded an impressive underwriting result in 2005 38
Figure 10: Commissions and expenses declined marginally relative to GWP in 2005 39
Figure 11: Household reinsurance ceded grew marginally in 2005 41
Figure 12: Gross claims incurred by the household insurance market increased in 2005, as weather claims costs returned to a more normal level 43
Figure 13: Weather damage claims costs rose in 2005, after a benign year in 2004 45
Figure 14: Domestic fire claims increased by 9.8 per cent in 2005, but the commercial sector was more seriously affected and as a proportion of total fires, domestic claims declined 46
Figure 15: The number of household theft claims has fallen since 2001, but the average value of a claim did not decline correspondingly in 2004 and 2005 48
Figure 16: The decline in the number of burglaries slowed significantly in 2005/6, corresponding to worsening unemployment rates 49
Figure 17: Homes with no security measures are at a very high risk of burglary; almost one in five is burgled each year 51
Figure 18: Subsidence claims costs increased in 2005, but the average payout remains much lower than it was 5 years ago 53
Figure 19: Corporate partnerships have increased over the last five years taking business away from many other distribution channels 56
Figure 20: The influence of the phone and the Internet have increased at the expense of face-to-face distribution in the household sector 58
Figure 21: Over half of people surveyed in 2006 said they chose their home insurance provider because it offered a cheaper quote 60
Figure 22: Consumer loyalty is least prevalent among those arranging their household insurance online 62
Figure 23: Consumers who use the telephone and Internet to purchase household insurance are the most price conscious 64
Figure 24: Direct Line was the most recognized home insurance brand in 2006 66
Figure 25: Saga recorded the highest buildings and contents advertising expenditure in 2005 69
Figure 26: HBOS subsidiaries Esure and Halifax spent heavily on promoting contents insurance in 2005 73
Figure 27: Norwich Union recorded strong household market share growth in 2005 83
Figure 28: Norwich Union recorded strong premium income growth in 2005, while Churchill has grown significantly since 2000 85
Figure 29: On average property insurers increased premium income in 2005, but also saw their loss ratios rise 89
Figure 30: With the exception of a few companies like Lloyds TSB, NIG and Ecclesiastical, most property insurance providers saw expense ratios rise in 2005 93
Figure 31: Scenario 1: Key variables affecting GWP growth, 2006e-11f 100
Figure 32: Scenario 1: GWP falls in 2006 but begins to increase in 2007 101
Figure 33: Slow NWP growth causes the household underwriting result to fall between 2006 and 2008 103
Figure 7: Scenario 2: Key variables affecting GWP growth, 2006e-11f 105
Figure 35: Scenario 2: GWP is stronger during 2007 106
Figure 36: Scenario 2: The market achieves strong underwriting profitability between 2006 and 2011 108
Figure 37: Scenario 3: Key variables affecting GWP growth, 2006e-11f 110
Figure 38: Scenario 3: GWP declines in 2006 and 2007 111
Figure 39: Scenario 3: The household insurance market enters an unprofitable period in 2007 113
Figure 40: Datamonitor's core consulting capabilities 122

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