Market Developments in UK Commercial Property Insurance 2008

This report provides a comprehensive analysis of the commercial property insurance market in the UK. It looks at the size of the market, claims costs and the main market trends. It also includes forecasts of the size of the market and the profitability of the market up until 2012.

Report Highlights
Intense competition in the commercial property market saw GWP continue on its downward trajectory. It shed a further 7.1% off its 2006 level falling to £4.6 billion. After three consecutive years of decline, the market looks on the verge of turning the corner, with increased underwriting discipline set to return to the market.

Following a fall in claims costs in 2006, largely as a result of benign weather conditions, windstorm Kyrill and the summer floods of 2007 were the chief contributors towards an upward spike in the cost of commercial property claims from weather-related incidents.

The increase in business interruption costs in 2007 came largely as a result of weather damage. After falling by 57% in 2006, claims costs following weather damage increased by 730% from £20m to £166m, in 2007.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
MARKET CONTEXT 2
Introduction 2
Despite falling GWP, the commercial property insurance market made a respectable return in 2006 2
GWP in the commercial property market continued to fall in 2007 2
Commercial property insurance remained profitable in 2006 albeit at lower levels 2
Market expense and claims ratios showed little movement 4
The claims ratio remained fairly static in 2006 4
The expense ratio experienced the greatest movement between 2005 and 2006 4
The underwriting ratio suffered a negligible deterioration in 2006 4
Commercial property claims costs soared in 2007 due to the summer floods 5
The summer floods effectively pushed weather-related claims costs up significantly in 2007 5
Weather claims costs were much higher in 2007 7
Business interruption costs following both fire and weather damage rose in 2007 8
The increase in the total cost of theft claims was mainly driven by an increase in the total number of claims 9
The summer weather events were estimated to cost the industry £3 billion 11
The windstorm ""Kyrill"" left insurers with an estimated bill of £350m 11
Heavy rainfall in both June and July led to flooding in various locations across the UK costing the insurance industry an estimated £3 billion 11
Insurers believe that commercial property fire regulation should be reformed 12
Despite a blaze at a Cornish hotel, the number of commercial property fires was down even though overall costs were not 12
Insurers are alarmed over non-existent government measures regarding the prevention of warehouse fires 13
The impact of fires on modern construction is not always fully known 13
FUTURE DECODED 14
Introduction 14
Under the neutral scenario the market makes an underwriting profit between 2008 and 2012 14
The commercial property market moves into a loss as fierce competition maintains downward pressure on premiums 14
Datamonitor forecasts that after contracting in 2007, the commercial property market will grow to £5.4 billion in GWP by 2012 14
The commercial property market experienced a large underwriting loss in 2007 but is forecast to make underwriting profits from 2008 onwards 16
The market remains unprofitable in our pessimistic scenario throughout the forecast period 18
The market experiences intense competition in 2007 and pressure continues to be exerted on rates for longer than anticipated 18
The market is expected to contract sharply again in 2008 under this pessimistic scenario 19
The market is estimated to have made a large underwriting loss in 2007 and is forecast to remain unprofitable 21
In the optimistic scenario, commercial property insurance GWP increased steadily between 2008 and 2012 and the market makes solid underwriting profits 23
After intense price competition in 2007, the market sees prices rise in 2008 and thereafter 23
The commercial property insurance market experiences strong growth after a dip in 2007 24
The commercial property insurance market returns to profitability in 2008 26
APPENDIX 29
Definitions 29
ABI definitions 29
Brokers 29
National brokers 29
Chain brokers & telebrokers 29
Other intermediaries & brokers 29
Direct 29
Other company agents 29
Utilities/retailers/affinity groups 29
Company staff 29
Banks/building societies 29
Written premiums 30
Gross premiums 30
SynThesys Non-Life database definitions 30
Total commercial property 30
Further reading 30
Ask the analyst 30
Datamonitor consulting 30
Disclaimer 30
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Table 1: Commercial property insurance GWP, 2002-07e 2
Table 2: Commercial property insurance underwriting account, 2002-06 3
Table 3: Commercial property insurance claims, expense and underwriting ratios, 2002-06 5
Table 4: Gross incurred commercial property claims by peril, 2003-07 (£m) 6
Table 5: Weather-related claims costs for commercial property insurance, 2003-07 (£m) 7
Table 6: Costs of business interruption claims by cause, 2003-07 (£m) 9
Table 7: Cost, volume and average value of commercial property theft claims, 2003-07 11
Table 8: Neutral scenario: Key variables affecting commercial property insurance GWP, 2007e-2012f 14
Table 9: Neutral scenario: forecast GWP for the commercial property market, 2002-2012f 16
Table 10: Neutral scenario: forecast underwriting result for commercial property, 2002-12 18
Table 11: Pessimistic scenario: Key variables affecting commercial property insurance GWP, 2007e-2012f 19
Table 12: Pessimistic scenario: forecast GWP for the commercial property market, 2007e-2012f 21
Table 13: Pessimistic scenario: forecast underwriting result for the commercial property insurance market, 2002-2012f 23
Table 14: Optimistic scenario: Key variables affecting commercial property insurance GWP, 2007e-2012f 24
Table 15: Optimistic scenario: forecast GWP growth, 2007e-2012f 26
Table 16: Optimistic scenario: forecast underwriting result for the commercial property market, 2002-2012f 28
Figure 1: The commercial property underwriting result decreased in 2006 3
Figure 2: The commercial property insurance underwriting ratio fell slightly in 2006 as the expense ratio rose 4
Figure 3: Weather claims costs increased significantly in 2007, while other costs remained fairly flat 6
Figure 4: The cost of commercial property weather-related claims grew significantly in 2007 7
Figure 5: The surge in business interruption costs was driven by claims following weather damage 8
Figure 6: In 2007, the number of theft claims began to increase, while average value leveled off 10
Figure 7: Under our neutral scenario, GWP declines further in 2008 before experiencing solid growth between 2009 and 2012 15
Figure 8: Under our neutral scenario the market makes an underwriting profit between 2008 and 2012 17
Figure 9: Under our pessimistic scenario, GWP grows less than 1% annually between 2007 and 2012 20
Figure 10: Under our pessimistic scenario the market remains unprofitable 22
Figure 11: Under our optimistic scenario, commercial property insurance GWP is set to reach £6.1 billion in 2012 25
Figure 12: Under our optimistic scenario the market makes strong profits 27
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