Five Factors that will shape the future of UK General Insurance

Publication Date	August 2006
Publisher	Datamonitor
Product Type	Report
Pages	12
ISBN Number	not applicable
Product Code	DAT00425

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Summary

Introduction

This brief provides five key predictions for the state of the UK general insurance market in 2007 and beyond, and explains the impact of these predictions on the insurance industry. Predictions discussed include the rise of Internet distribution and the length and severity of the soft cycle.

Scope

Datamonitor estimates of the percentage of motor and household insurance sold via the Internet and forecasts for the growth of this channel to 2009
An overview of Datamonitor forecasts for the soft cycle, explaining why it is expected to be less severe than previous soft cycles
Forecasts for the creditor market, where media scrutiny is expected to lead to a slump as penetration rates and commission rates fall

Highlights

The proportion of private motor insurance sold online is predicted to reach 29 per cent by 2009, up from an estimated 12 per cent in 2005. The predicted growth will be driven largely by the direct channel and the continued transference of business from the telephone to the Internet.

Premium income growth is forecast to pick up for many lines in 2007 with the result that insurers' profitability should suffer less in this soft cycle than in previous slumps. The last soft cycle lasted from 1994 to 1999, therefore Datamonitor also believes that this soft cycle will be slightly shorter than the previous cycle.

The regulatory and media scrutiny of the PPI insurance sector is likely to lead to a drop in penetration and commission rates. This will lead to declining premium income, before the market stabilizes beyond 2007. The compound annual growth rate for all lines of PPI between 2006 and 2010 is forecast to be just 1.7 per cent under these assumptions.

Reasons to Purchase

Understand the key drivers of the rise of Internet distribution and its likely effect on the market
Get Datamonitor opinion on the length and severity of the current soft cycle
Understand how broker consolidation, the Legal Services Bill, and scrutiny of PPI insurance is likely to influence the general insurance market

Content

Catalyst
Summary
Methodology
Analysis
- The use of the Internet to buy personal insurance will grow rapidly in the next five years
- 20 per cent of motor insurance and 13 per cent of household insurance will be sold via the Internet in 2007
- Motor insurance internet sales are forecast to grow from 12 per cent in 2005 to account for 29 per cent of the market in 2009, driven by the direct channel
- Online household insurance sales will also increase rapidly over the next couple of years to account for 17 per cent of the market in 2009
- Aggregators will make it easier for consumers to quickly compare the offerings of different insurers online
- The growth of the online sales channel will speed up commoditization and increase price-based competition
- The underwriting cycle will be less volatile
- Improvements in premium income are forecast for many lines already in 2007
- The current cycle seems to be affecting commercial lines particularly, but 2007 is nonetheless expected to be the first year of significant premium income growth for many lines in the commercial and personal markets
- The volatility of the underwriting cycle has been reduced by the level of consolidation in the market
- Shareholder pressure and better technical pricing models also play a role
- The less severe soft cycle will improve profit margins for insurers
- The creditor insurance market is likely to suffer a slump in the near future
- Regulatory scrutiny and negative media coverage will lead to a reduction in commission and penetration rates, reducing the income insurers and lenders gain from payment protection insurance
- The OFT is investigating the PPI sector following a super-complaint from the Citizens Advice Bureau
- As a result the creditor insurance market is expected to decrease in 2006 and 2007
- A loss of earnings on PPI for banks and building societies could focus their attention on other insurance products and increase competition in the general insurance market
- The Legal Services Bill will create competition for the provision of legal services, with knock-on effects for the personal injury sector
- The Legal Services Bill, coming into force in 2007, is unlikely to affect the insurance market in the short term due to the controversial nature of personal injury litigation
- The controversy surrounding personal injury litigation will prevent big brands from setting up personal injury services
- If big brand names such as the AA were to launch personal injury services in 2007 it would lead to higher numbers of personal injury claims
- The impact of the Bill on the insurance industry will be limited, at least in the short term
- The broker market is set to see further consolidation
- The fragmented nature of the broker market, the age profile of many principals, venture capital and more recently FSA regulation have combined to create the consolidation in the broking sector
- There are a small number of broker consolidators with ambitious growth targets
- There are two prongs to Towergate's acquisition strategy
- There is the potential for one of the largest UK insurers to buy the Towergate Partnership and gain a very large share of the SME market
Appendix
- Definitions
- Payment protection insurance (PPI)
- Gross Written Premium
- CAGR
- Extended methodology
- Further reading
- Datamonitor consultancy
- Ask the analyst
List of Tables
- Table 1: Creditor insurance forecast GWP by sector, 2005e-10f
List of Figures
- Figure 1: Datamonitor's forecast for the motor market's underwriting result shows that this soft cycle is expected to be less severe than the previous cycle