Executive Summary

Introduction
This report focuses primarily on the UK insurance market and on the industry that provides the insurance products. Reference is made to overseas markets in two chapters: Market Overview and Competitor Analysis.

This report comes at a time of great change in the industry. There have been many mergers and acquisitions in recent years, foreign ownership of UK insurers has increased, and the downfall of several insurers during 2000 and 2001 has once again put the spotlight on this industry.

Market Overview
Insurance is split into two sectors: long-term and general insurance.

Long-term insurance includes:

• life insurance
• pensions
• annuities
• income protection (formerly called permanent health insurance).

General insurance covers:

• motor
• property
• accident and health
• pecuniary loss
• general liability.

Key Note estimates that the total UK market in 2000 was £132.53bn, of which £108.28bn (81.7% of the total) was long-term insurance and £24.25bn (18.3%) was in general insurance.

Most of the market is in the hands of UK-based companies, but some of these are actually owned by foreign insurers.

Insurance is an international business in which the UK, through the `London Market', plays a big part. The Association of British Insurers (ABI) describes the London Market as the world's leading market for internationally traded insurance and reinsurance. The London Market has around 30% of the world's aviation and marine insurance.

UK-based insurance companies derive a growing proportion of their income from overseas. In 2000, Key Note estimates that 15.6% of the total market for long-term insurance income came from overseas and that 36% of general insurance income was won in overseas markets.

Key Note estimates that, in 2000, there were 827 companies authorised to operate in the UK market and that they employed 229,000 people. Including related organisations and professional practices such as brokers, the insurance industry now employs around 344,000 people.

Lloyd's has recovered from the problems that beset it for many years. Improving profitability, coupled with stronger premium rates globally, mean that its future is more secure. In addition, the top management of the Corporation of Lloyd's have brought in new capital and effectively doubled its insurance capacity since 1997.

Distribution
Distribution channels are an important feature of insurance. There are a number of different channels, including: intermediaries, direct salesforces, tied agents and independent financial advisers. Insurance intermediaries represent a key channel for insurance products, accounting for 50% of personal lines general insurance business, 87% of commercial lines general insurance business, 40% of new yearly premium long-term business and 56% of new single premium pensions business.

The Global Context
Key Note estimates that the global market for insurance in 2000 was £1,380bn, of which Europe accounted for £441.6bn and the UK for £132.53bn. The UK market therefore represents 9.6% of the global market.

External Influences
A new General Insurance Standards Council was set up in 2000, which has been developing rules and policies in 2001. A government-supported review of the long-term savings market started in June 2001. Meanwhile, a new directive on intermediaries has been drawn up in Brussels. All these external initiatives will have an impact on the UK insurance industry. The big question now is solvency and the financial management of insurance companies. There lurks the possibility of yet more regulation, although as yet there is no inkling of this from the Government.

Claims volumes and costs are likely to rise across a whole number of insurance sectors. The economy's immediate future looks increasingly uncertain. At the same time, some concerns have been expressed about the financial basis for the UK's life and pension funds.

Technologically, there are many changes taking place in the insurance industry. Online insurance is growing, as IT is becoming increasingly important and outsourcing is being seen as a sensible option to deal with the challenges of the market in the future.

Key Trends and Prospects
Some clear patterns are emerging, with the two key ones being a more focused approach by the leading insurers and a hardening of premium rates. The hardening of rates in the UK and internationally is extremely welcome for the insurers, coming as it does after years of generally weak rates. As this report was published in September 2001, a senior executive at CGNU commented that he did not see any weakening of rates in the near future.

Consumer Research
Key Note commissioned NOP World to survey public attitudes towards, and experience of, insurance companies. The survey showed that most people, by their own admission, have little understanding of what their insurance policy gives them. The survey also shows that most people are satisfied with the claims process when they have made a claim.

According to the survey results, fairly few people actually change their insurer. However, in motor insurance and property insurance, 15% and 9% of people respectively, do change their insurer.

The survey also suggested that people rarely feel that their policies give them value for money. However, satisfaction with the value of motor and property insurance tends to be much higher than for other kinds of insurance, but this may be because people have taken more trouble to ensure that the motor or property policy that they have is right for them.

When people were questioned as to whether they were concerned about the financial health of their insurers, the majority stated that they were not. Only 5% expressed such a concern, but those aged 35 to 44 and those in the AB social group (the professional classes) are more inclined to have some worries on this score.

Competitor Analysis
The Competitor Analysis chapter lists the top ten general insurers, the top ten long-term insurers and also the top ten insurers in Europe by market capitalisation. The European table shows the strength of the major German, Swiss and French insurers.

This chapter profiles the 17 largest UK-based companies insurers.

Advertising spending, which has increased by 14% in the year to March 2001, is also examined.

INDUSTRY SECTORS

Long-Term Insurance
The long-term insurance market, sometimes called the life and pensions market, accounts for more than 80% of the UK insurance market. In the 1980s, it represented around 60% of the market and by 1995, 68.4%. Since 1995 this market's position relative to general insurance has strengthened enormously.

The ABI estimates that just five insurers account for 42% of the market.

Pension policies represent 57.7% of this market in terms of market revenue. This sector is growing at a phenomenal rate. Since 1996, the value of occupational pensions, for example, has more than trebled.

Key Note forecasts that the market will grow by 52.4% by the year 2006 to stand at £178.24bn.

Motor Insurance
The UK motor insurance sector represents 38% of general insurance total premium income. As such, it is the largest sector of the general insurance market. Motor insurance covers more than 27 million vehicles in the UK. Since 1996, premium income has risen by 31.9% but most of the increase occurred after 1998. This sector has not made a profit for years. Rising claims and weak premiums have put paid to that hope.

It has become an extremely competitive market, with just five companies accounting for 57% of the market by revenue. Half of the top ten insurers are foreign-owned.

Rate increases began to kick in during 2000 and have continued during 2001. Key Note forecasts that between 2001 and 2006 the value of this market will grow by 27.6% to £12.72bn.

Property Insurance
Property insurance represents 27% of the general insurance market. Key Note estimates that in 2000, premium income from this sector was £6.6bn, which represents an increase of 0.4% on the previous year. Figures for 2001 will show a significant rise in income, arising from raised premium rates, which is long overdue, given the losses sustained since 1996 and the high level of claims at the end of 2000.

Total domestic and commercial claims have risen in value by 28.2% since 1996 to stand at £3.48bn. Fraudulent claims account for around £250m a year. Both the ABI and the individual insurers are trying to halt the incidence of fraud.

Key Note forecasts that this market will grow in value by 10.4% between 2001 and 2006.

Accident and Health Insurance
This sector accounts for 14% of the general insurance premium income. Since 1996, the market has grown by 18.7%. The ABI estimates that 55% of this sector is represented by private medical insurance.

Ten insurers have between them 84% of this market. The top five companies have 64% of the market, according to estimates by the ABI.

This sector is no longer making healthy profits. In fact, losses are rising as a result of increasing claims value and the costs of administration.

Key Note forecasts that the market will grow by 10.4% between 2001 and 2006.

Pecuniary Loss Insurance
Pecuniary loss accounts for only a minor share of the UK insurance market, but it is important. It covers business interruption, credit insurance and mortgage indemnity. Key Note estimates that the value of this sector has grown by 38.7% since 1996.

Profitability in this sector has been fairly strong. Since 1997, it has been on a rising trend, with an underwriting profit in 2000 of £2.26bn, according to Key Note estimates. Key Note forecasts that between 2001 and 2006 the market's value will rise by 45.6%.

Pecuniary Loss Insurance
General liability insurance covers a policyholder's legal liability for injury, property damage or financial loss caused to others. This sector covers quite a range of insurance risks, such as product liability, public liability, professional indemnity and employers' liability. Around 39% of the market is accounted for by employers' liability insurance.

This is one sector where total income has been declining. Revenues fell by 16% between 1996 and 2000, according to Key Note estimates. The sector has made a loss every year from 1996 onwards. Key Note forecasts that between 2001 and 2006 total revenues will increase by 20.5%. This scenario flies in the face of the recent trends, but Key Note believes that insurers will have no choice but to raise rates as claims costs rise strongly in the near future.

THE FUTURE

Key Note estimates that the total UK insurance market will grow by 35.3% between 2001 and 2006 and that long-term insurance will grow by 39.8%. These figures need to be set against an economy that looks certain to weaken during 2002. A recession may well be avoided, but a prolonged slowdown does look likely.

There are three continuing developments:

• mergers and acquisitions are likely to continue as companies expand and refocus their activities
• insurance provision by well-known consumer brands is set to rise
• online insurance is likely to grow as more and more people become acclimatised to this method of insurance buying and as the insurers put in place the necessary technical initiatives.

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