UK Commercial Property Insurance 2007 (Market Focus)

In 2006, the commercial property insurance market contracted as soft market conditions took hold. This brief provides an in-depth analysis of the current and future commercial property market in the UK, analyzing the key trends in premium income, claims and profitability.



Report Highlights
Commercial property insurance GWP declined by 6.9 per cent in 2006 to £4.9 billion. The principle driver for the decline was increased competition. Commercial property claims costs decreased significantly in 2006, following a difficult year in 2005. Claims costs resulting from fire and weather damage declined, and as a result, business interruption costs also moderated On balance the market is expected to have seen further rate decreases in 2006 and is forecast to see premium rate deflation in 2007.


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CHAPTER 1 MARKET CONTEXT 5
Introduction 5
The commercial property market suffered in 2006, continuing the trend from 2005 5
Premium income fell by 6.9 per cent in 2006 5
The commercial property underwriting result fell by 38.6 per cent in 2005 6
Commercial property insurance performance ratios deteriorated in 2005 8
The claims ratio increased after a long run of improvements 8
The expense ratio increased by 4.1 percentage points in 2005 8
The underwriting ratio also deteriorated in 2005 as both the claims and expense ratios increased 8
Commercial property claims fell in 2006 10
Commercial property claims costs resulting from fire, business interruption and weather damage all fell in 2006 10
Commercial fire numbers fell in 2005 11
Weather claims costs declined in 2006 13
Business interruption claims costs, following fire and weather damage, fell in 2006 14
Theft claims costs increased due to higher average claim values in 2006 15
The industry remains concerned about future losses related to fire and flood as recent changes have heightened uncertainty in both 17
A fireworks blaze ended an otherwise quiet year for fire related property claims 17
The future state of Britain's flood defences have become a source of concern for insurers due to recent policy changes 18
Future risks are also seen as becoming more unpredictable as climate change alters rain and storm patterns 18
Fire regulation changes that came into effect in Oct 2006 also decrease the ability of insurers to gauge risk accurately 19
Total losses have increased, with insurers noticing more large fire losses in 2006 20
CHAPTER 2 THE FUTURE DECODED 21
Introduction 21
The commercial property insurance market experiences strong price competition, and moves into an underwriting loss in 2007 21
The commercial property insurance market is experiencing intense competition 21
Datamonitor forecasts that the commercial property insurance market will reach £5.5 billion in GWP by 2011 23
The commercial property insurance market is forecast to move into an underwriting loss in 2007 25
In the optimistic scenario, the UK commercial property insurance market is forecast to reach £5.7 billion in GWP by 2011 if price competition is muted 27
The commercial property insurance market experiences intense competition in 2006 27
Commercial property insurance GWP dips in 2007, followed by increases between 2008 and 2011 28
In the optimistic scenario, the commercial property insurance market regains profitiability in 2009 30
In the pessimistic scenario, strong rate cutting in 2007 leads the commercial property insurance market to record stronger losses 32
The commercial property insurance market experiences intense competition in 2006 and in 2007 32
The commercial property insurance market sees a strong contraction in 2007 followed by a period of growth between 2008 and 2011 33
Underwriting losses peak at £254 million in 2008 35
CHAPTER 3 APPENDIX 38
Premium income measures 38
Earned premiums 38
Gross Premium 38
Net Premium 38
Written premiums 38
Current readings 38
Future readings 38
Do you need more information? 39
Datamonitor Financial Services Consulting 39
SPP writing team 41

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Table 1: Commercial property insurance GWP, 2001-2006e 6
Table 2: Commercial property insurance underwriting account, 2001-5 8
Table 3: Commercial property insurance claims, expense and underwriting ratios, 2001-5 9
Table 4: Gross incurred commercial property claims by peril, 2002-6 11
Table 5: Number of UK fires, by location, 2001-5 13
Table 6: Commercial property insurance weather claims costs, 2002-6 14
Table 7: Cost of business interruption claims by cause, 2002-6 15
Table 8: Total cost of commercial property insurance theft claims, 2002-6 16
Table 9: Number of commercial property theft claims, 2002-6 17
Table 10: Average value of commercial property theft claims, 2002-6 17
Table 11: Neutral scenario: Forecast GWP for the commercial property insurance market, 2001-11f 25
Table 12: Neutral scenario: Forecast underwriting result for the commercial property insurance market, 2001-11f 27
Table 13: Optimistic scenario: Forecast GWP for the commercial property insurance market, 2001-11f 30
Table 14: Optimistic scenario: Forecast underwriting result for the commercial property insurance market, 2001-11f 32
Table 15: Pessimistic scenario: Forecast GWP for the commercial property insurance market, 2001-11f 35
Table 16: Pessimistic scenario: Forecast underwriting result for the commercial property insurance market, 2001-11f 37


Figure 1: Commercial property insurance GWP contracted in 2005 and 2006 6
Figure 2: The commercial property insurance underwriting result fell by over a third in 2005 7
Figure 3: Commercial property insurance claims and underwriting ratios both deteriorated in 2005 9
Figure 4: Fire, business interruption and weather claims costs relating to commercial property insurance fell in 2006 11
Figure 5: The number of commercial property fires fell in 2005 12
Figure 6: The cost of commercial property weather claims declined in 2006 14
Figure 7: Business interruption claims costs fell in 2006 following the lack of weather events 15
Figure 8: 2006 saw a drop in the number of commercial property theft claims but an increase in the average value of each claim 16
Figure 9: A fire decimated a fireworks factory in East Sussex in 2006 18
Figure 10: Key to the relative importance of forecast variables 21
Figure 11: Neutral scenario key variables affecting commercial property GWP, 2006e-11f 23
Figure 12: Neutral scenario: commercial property insurance GWP declines in 2007 before increasing between 2008 and 2011 24
Figure 13: The commercial property insurance market is forecast to move into an underwriting loss in 2007 with losses peaking in that year at £111 million 26
Figure 14: Optimistic scenario: key variables affecting commercial property GWP, 2006e-11f 28
Figure 15: Commercial property insurance GWP reaches £5.7 billion in GWP by 2011 29
Figure 16: The commercial property insurance market moves into an underwriting loss in 2007 before recovering profitability in 2008 31
Figure 17: Pessimistic scenario: key variables affecting commercial property GWP, 2006e-11f 33
Figure 18: Commercial property insurance GWP reaches £5.5 billion in 2011 34
Figure 19: The commercial property insurance market is forecast to move into a loss in 2007 and for losses to peak at £254 million in 2008 36

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