S&P: High Claims Slow Recovery of UK Motor Insurance

    LONDON, Jan. 25 The recovery of the U.K. motor insurance
market was boosted in 1999 by a 10% rise in gross premiums written to
GBP9.32 billion ($14 billion) and a four percentage point improvement
in its overall loss ratio to 95%, according to an industry report published
today by Standard & Poor's.
    A 10% rise in claims frequency tempered the result, however, making 1999
the highest year for claims frequency since 1994, with claims representing
17.5% of total policies issued. "If the market continues to follow current
trends, it will be several years before many motor insurers achieve combined
ratios at the 'breakeven' 100% level," said David Laxton, a director at
Standard & Poor's Financial Services Group and co-author of the report.
    The report notes that, despite a steady increase in premiums since 1996,
the motor insurance industry's performance was in decline until 1999, with
incurred loss ratios rising 25.9% between 1994 and 1998. "Nevertheless, since
1995 the volume of motor business written has risen 11%, with the top 10
players in 1999 consistently holding the lion's share of the market," Mr
Laxton said. He warned, though, that competition remains strong and that the
arrival of Internet-driven providers, such as Egg and Virgin, could put
further downward pressure on the market.
    Cost savings made by direct selling over the Internet or telephone will,
nevertheless, be of increasing value as insurers try to maintain their
competitiveness -- a point exemplified by the comparatively low expense ratio
of Direct Line at 10%, compared with an industry average of 23%. "Insurers
will find it difficult to employ the cost-saving techniques of direct sales as
the competition is firmly entrenched, although they will achieve significant
benefits if they manage to obtain enough critical mass in the market," Mr
Laxton said.
    The report shows that the average combined ratio among motor insurers for
1999 was 118%, although most leading players showed combined ratios that were
average or above average. "Broker-based insurer Fortis Insurance performed
particularly well, improving more than five percentage points from 1998 to
achieve a combined ratio of 100%. Conversely, the Co-operative showed a
particularly disappointing performance, with its combined ratio declining to
nearly 166% in 1999, from 122.7% in 1997," Mr Laxton commented.
    There were 73 companies and 97 Lloyd's syndicates writing motor business
in the U.K. in 1999. The company market accounted for 85.6% of total gross
premiums written, with the top 10 players responsible for 73% of the
non-Lloyd's total. "Consolidation has had a large effect on market share," Mr
Laxton said. "In 1995, the top 10 insurers held 54% of market share, but by
1999 the top five accounted for an almost identical share at 53%."
    Although Royal & Sun Alliance led the market in 1998 and 1999, with a 15%
market share, CGU and Norwich Union's merger in 2000 created a new leader,
with 25% of the market. "Consolidation will continue in 2001, with more small
and midsize companies combining in order to take advantage of the economies of
scale that such a move offers," Mr Laxton predicted.
    Copies of Standard & Poor's related articles are available on
RatingsDirect, Standard & Poor's Web-based credit analysis system, at
http://www.ratingsdirect.com, Standard & Poor's said. -- CreditWire