UK Commercial Property Insurance 2009

Introduction

This report provides a detailed analysis of the UK commercial property insurance market. It looks at the size of the market, performance ratios, claims costs, key issues and distribution trends. It also assesses the competitive landscape providing market share information and forecasts the total market GWP up to and including 2013.

Scope

*An examination of market size, growth and profitability.

*Analysis of the key drivers of claims inflation.

*Market share and combined ratio data for the largest commercial property insurers.

*Forecasts of market size and profitability to 2013.

Highlights

The market peaked in terms of premium growth rates in 2002 and thereafter growth rates declined moving into negative territory in 2005. Between 2005 and 2007 the market contracted before seeing growth for the first time in several years in 2008, as insurers put through small rate increases. In 2008 the market was worth £4.3 billion.

Analysis of gross incurred claims for the period to H1 2009 indicates that claims costs have been fairly benign for the first half of 2009 which bodes well for the sector. Gross incurred claims totaled £737m for H1 2009 which compares to £757m for H1 2008 and represents a fall of 2.6%.

Industry executives believe that the issue of players seeking market share for new business will hamper any renewal rate increase in the immediate future.

Reasons to Purchase

*Understand the direction in which the commercial property insurance market is moving in terms of premium rates, profitability and future claims.

*Assess the market share of the major distribution channels, the key players and the latest competitor developments.

*Gain insight into the views and opinions of some of the leading industry executives.


Report Highlights

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Overview 1
Catalyst 1
Summary 1
Executive Summary 2
The market grew slightly as insurers put through small rate increases 2
The market was worth £4.3 billion 2008 2
Commercial property insurers suffered from a high COR in 2008, net of reserve releases 2
The sector made a profit after the effects of reserve releases 2
2009 has been a benign year for claims costs so far 2
2009 is shaping up to be another benign year for claims costs 2
Large national brokers continue to dominate commercial insurance distribution 3
Independent insurance intermediaries of all types retained their majority market share in 2008 3
Allchurches and Travelers both gained market share 4
Allchurches experienced a 0.5 percentage points growth in its market share to 4.4% of the commercial property market 4
Travelers witnessed a significant 14% growth in GWP 4
Aviva, RSA, Zurich, AXA and Allianz continue to hold the top 5 market positions 4
Aviva was the market leader in 2008 4
Zurich retained its third place ranking 4
AXA experienced a 4.1% decline in GWP, taking its market share to 11.1% in 2008 4
Allianz's market share for 2008 was 7.2%, making it the fifth largest player 4
ACE was the ninth largest commercial property insurer in 2008 5
Underwriting losses will decrease as the market hardens 5
The commercial property market is predicted to be worth £5.9 billion by 2013 5
Table of Contents 6
Table of figures 7
Table of tables 8
Market Context 9
Introduction 9
The market grew slightly as insurers put through small rate increases 9
The market was worth £4.3 billion 2008 9
In terms of real growth, the market contracted by 2.1% in 2008 11
Commercial property insurers suffered from a high COR in 2008, net of reserve releases 13
The sector made a profit after the effects of reserve releases 13
The COR, excluding reserve releases, reached 115% in 2008 15
Reserve releases expanded significantly throughout 2008 16
Commercial property insurers made sizeable reserve releases in 2008, higher than 2007 levels 16
2009 has been a benign year for claims costs so far 18
2009 is shaping up to be another benign year for claims costs 18
Commercial property claims costs resulting from fire and theft increased in 2008 20
The AXA Business Crime Index has shown a marked increase of recessionary crime 21
More than half of total claims costs in commercial property arose from fires in 2008 22
Modern methods of construction, amongst other things, have lead to the increase in fire losses 23
The 'Approved Document B (Fire safety)' has been one of few steps in recent years to mitigate fire risks 24
Automatic fire protection systems that generate false alarms may prompt higher premiums 24
Weather related commercial property claims decreased significantly in 2008 24
Business interruption claims costs following fire grew by 21.7% in 2008 25
The cost of commercial property insurance theft claims increased marginally in 2008 26
The average value of a theft claim increased to £4,515 in 2008 from £4,223 27
Insurers are pressuring the government for improvements in flood defenses 29
The 2007 floods were a catalyst for insurers seeking government assistance to limit flood risk exposure 29
The Draft Floods and Water Management Bill has been warmly welcomed by the industry 29
The 2009 Budget commitments showed some signs of the government listening to the insurance industry 30
The UK Climate Projections provides valuable information and data about climate change 30
The Ordinance Survey's data-rich resources are also of much use to the insurance industry 31
However, insurers still feel that the government should spend more on flood defenses 31
There is a risk that the Statement of Principles will not be renewed unless more government action is taken 32
Distribution 33
Introduction 33
Large national brokers continue to dominate commercial insurance distribution 33
Independent insurance intermediaries of all types retained their majority market share in 2008 33
Electronic distribution is gathering pace and insurers believe that it will become more prevalent 33
Direct players account for a small but growing portion of the commercial general insurance market 34
Corporate partnerships have maintained only a small presence in the commercial insurance market 34
Banks and building societies distribute negligible amounts of commercial general insurance 36
30% of SMEs would consider purchasing their insurance policy from a bank or building society 36
Brokers remained the dominant distribution channel to target SMEs in H1 2008 37
Competitive Dynamics 38
Introduction 38
Allchurches and Travelers both gained market share 38
Allchurches experienced a 0.5 percentage points growth in its market share to 4.4% of the commercial property market 38
Travelers witnessed a significant 14% growth in GWP 38
Aviva, RSA, Zurich, AXA and Allianz continue to hold the top 5 market positions 38
Aviva was the market leader in 2008 38
Zurich retained its third place ranking 38
AXA experienced a 4.1% decline in GWP, taking its market share to 11.1% in 2008 38
Allianz's market share for 2008 was 7.2%, making it the fifth largest player 39
ACE was the ninth largest commercial property insurer in 2008 39
Travelers, Zurich, RBS, Allianz and Aviva beat the market average COR, after allowing for reserve releases 40
Acquisitions by brokers continued, albeit at a slower pace than previous years 42
AXA has continued to increase its presence in the UK commercial insurance market through its broking arm Bluefin 42
Giles acquired numerous commercial brokers in 2008 43
Oval completed 12 acquisitions in the 12 months to June 2008 43
Cullum Capital Ventures continued with its acquisition strategy in 2008 and 2009 43
JLT acquired Ingham Underwriting 44
Future Decoded 45
Introduction 45
Underwriting losses will decrease as the market hardens 45
The market will grow slowly in 2009 and harden significantly thereafter 45
The commercial property market is predicted to be worth £5.9 billion by 2013 46
Losses, net of reserve releases, will fall as the market hardens 48
APPENDIX 50
Definitions 50
ABI members 50
Accident year combined ratio 50
Brokers 50
Earned premiums 50
Gross premiums 50
Net premium 50
Reported year combined ratio 50
Prior years' reserve development 50
Written premiums 50
Further reading 50
Ask the analyst 51
Datamonitor consulting 51
Disclaimer 51
List of Tables
Table 1: Total commercial property insurance GWP, 1995-2008 (£m) 11
Table 2: Commercial property premium real growth rates and average inflation, 1996-2008 (%) 13
Table 3: Commercial property underwriting profit/loss, 1998-2008 (£m) 15
Table 4: Accident year CORs for total property insurance and commercial property insurance, 2005-08 (%) 16
Table 5: Accident and reported year COR, underwriting results and reserve developments, commercial property insurance market, 2005-08 (%) 18
Table 6: Gross incurred commercial property insurance claims by peril, H1 2008-09 (£m) 19
Table 7: Gross incurred commercial property insurance claims by peril, 2004-08 (£m) 21
Table 8: Proportion of gross incurred commercial property insurance claims by peril, 2004-08 (%) 23
Table 9: Commercial property insurance weather claims costs, 2004-2008 (£m) 25
Table 10: Cost of business interruption claims by cause, 2004-08 (£m) 26
Table 11: Total cost of commercial property insurance theft claims, 2004-08 (£m) 27
Table 12: Volume and average value of property theft claims, 2004-08 29
Table 13: Market share of distribution channels in the commercial general insurance market, 2004-08 (%) 36
Table 14: GWP and market share of the top 10 UK commercial property insurance groups, 2007-08 40
Table 15: Reported year combined ratio and underwriting profit/loss for the top 10 commercial property insurance groups, 2008 42
Table 16: Key variables affecting GWP, 2009f-13f 46
Table 17: Forecast of UK commercial property insurance market GWP, 2009-13f 48
Table 18: Forecast of accident year COR, commercial property insurance market, 2009-13f (%) 49
List of Figures
Figure 1: The sector reported an underwriting profit in 2008; however, this was only made possible by releases of prior years' reserves 3
Figure 2: 2008 was the first time the market experienced positive premium growth since 2004 10
Figure 3: Strong competition within the market has kept real premium growth negative since 2005 12
Figure 4: The sector reported an underwriting profit in 2008; however, this was only made possible by releases of prior years' reserves 14
Figure 5: The COR, net of reserve releases for commercial property insurance, reached 115% in 2008 16
Figure 6: In 2008, there was significant reserve release in order to improve the reported year COR 17
Figure 7: H1 2009 claims costs are slightly lower than H1 2008 19
Figure 8: Claims arising from fire and explosions following fires increased the most in 2008 20
Figure 9: Fire claims accounted for the largest claims bill in the commercial property insurance market 22
Figure 10: Weather claims costs declined dramatically in 2008 25
Figure 11: Weather-related business interruption claims costs fell in 2008 while fire-related business interruption costs increased 26
Figure 12: Commercial property theft claims reached a value of £175m in 2008 27
Figure 13: The number of theft claims increased significantly in 2008 28
Figure 14: UKCP09 is a readily available source of information about various aspects of UK climate change 31
Figure 15: Brokers still remain the dominant route to market for commercial insurers in the UK 35
Figure 16: 82% of SMEs purchase their commercial insurance through brokers 37
Figure 17: Travelers and Allchurches gained market share in 2008 39
Figure 18: Travelers, Zurich, RBS, Allianz and Aviva beat the market average COR, after allowing for prior years' reserve releases 41
Figure 19: Premium rates increases will occur in order to improve the underwriting profitability of insurers 47
Figure 20: The COR for the commercial property market will decline throughout the forecast period 49

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List of Tables
Table 1: Total commercial property insurance GWP, 1995-2008 (£m) 11
Table 2: Commercial property premium real growth rates and average inflation, 1996-2008 (%) 13
Table 3: Commercial property underwriting profit/loss, 1998-2008 (£m) 15
Table 4: Accident year CORs for total property insurance and commercial property insurance, 2005-08 (%) 16
Table 5: Accident and reported year COR, underwriting results and reserve developments, commercial property insurance market, 2005-08 (%) 18
Table 6: Gross incurred commercial property insurance claims by peril, H1 2008-09 (£m) 19
Table 7: Gross incurred commercial property insurance claims by peril, 2004-08 (£m) 21
Table 8: Proportion of gross incurred commercial property insurance claims by peril, 2004-08 (%) 23
Table 9: Commercial property insurance weather claims costs, 2004-2008 (£m) 25
Table 10: Cost of business interruption claims by cause, 2004-08 (£m) 26
Table 11: Total cost of commercial property insurance theft claims, 2004-08 (£m) 27
Table 12: Volume and average value of property theft claims, 2004-08 29
Table 13: Market share of distribution channels in the commercial general insurance market, 2004-08 (%) 36
Table 14: GWP and market share of the top 10 UK commercial property insurance groups, 2007-08 40
Table 15: Reported year combined ratio and underwriting profit/loss for the top 10 commercial property insurance groups, 2008 42
Table 16: Key variables affecting GWP, 2009f-13f 46
Table 17: Forecast of UK commercial property insurance market GWP, 2009-13f 48
Table 18: Forecast of accident year COR, commercial property insurance market, 2009-13f (%) 49

List of Figures
Figure 1: The sector reported an underwriting profit in 2008; however, this was only made possible by releases of prior years' reserves 3
Figure 2: 2008 was the first time the market experienced positive premium growth since 2004 10
Figure 3: Strong competition within the market has kept real premium growth negative since 2005 12
Figure 4: The sector reported an underwriting profit in 2008; however, this was only made possible by releases of prior years' reserves 14
Figure 5: The COR, net of reserve releases for commercial property insurance, reached 115% in 2008 16
Figure 6: In 2008, there was significant reserve release in order to improve the reported year COR 17
Figure 7: H1 2009 claims costs are slightly lower than H1 2008 19
Figure 8: Claims arising from fire and explosions following fires increased the most in 2008 20
Figure 9: Fire claims accounted for the largest claims bill in the commercial property insurance market 22
Figure 10: Weather claims costs declined dramatically in 2008 25
Figure 11: Weather-related business interruption claims costs fell in 2008 while fire-related business interruption costs increased 26
Figure 12: Commercial property theft claims reached a value of £175m in 2008 27
Figure 13: The number of theft claims increased significantly in 2008 28
Figure 14: UKCP09 is a readily available source of information about various aspects of UK climate change 31
Figure 15: Brokers still remain the dominant route to market for commercial insurers in the UK 35
Figure 16: 82% of SMEs purchase their commercial insurance through brokers 37
Figure 17: Travelers and Allchurches gained market share in 2008 39
Figure 18: Travelers, Zurich, RBS, Allianz and Aviva beat the market average COR, after allowing for prior years' reserve releases 41
Figure 19: Premium rates increases will occur in order to improve the underwriting profitability of insurers 47
Figure 20: The COR for the commercial property market will decline throughout the forecast period 49
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