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

    LONDON--Standard & Poor's--Jan. 25, 2001--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 www.ratingsdirect.com, Standard & Poor's said. ---CreditWire