Performance Ratio Benchmarking of the Top UK General Insurers 2006

Published by: Datamonitor

Published: Nov. 22, 2006

Table of Contents

CHAPTER 1 INTRODUCTION

What is this report about?

Who is the target reader?

How to use this report

CHAPTER 2 MARKET CONTEXT

Soft market conditions were evident in many lines in 2005

The motor market led the decline with a reduction of 1.5 per cent

Property and accident and health also went into decline

Liability and pecuniary loss continued to improve

CHAPTER 3 PERFORMANCE RATIOS BY LINE OF BUSINESS

Introduction

The combined ratio for the top 20 general insurers improved in 2005, in spite of soft market conditions

Many insurers achieved further improvements on accounts that were already profit-making

Norwich Union, Zurich and Royal & SunAlliance improved their combined ratio in 2005 at the expense of premium income

Four insurers reduced their losses, although underwriting profitability still proved elusive

AXA, NIG, CIS and Churchill are moving in the right direction, though profit still eludes them

Five companies bucked the trend with increasing combined ratios in 2005

Expenses proved a bigger problem for insurers than losses in 2005, with both management expenses and commissions contributing to a rising expense ratio

Falling loss ratios ensured improvements in combined ratios for many insurers with rising expense ratios

The majority of insurers that saw improved profitability had falling loss ratios to thank, though a few insurers proved exceptions to this trend

Three of the five insurers that experienced increased combined ratios owed this increase largely to rising expense ratios

Overall, management expenses drove up net operating expenses, although increasing commission ratios also had a negative impact on expense ratios

Of the 12 insurers that increased their expense ratios in 2005 eight were affected mainly by rising management expense ratios, though for insurers such as Norwich Union and St Andrews rising commissions were the problem

Both commissions and management expenses grew faster than NWP in 2005, driving the rising expense ratio for the top 20 general insurers

Profitability declined in the accident and health market, driven by increases in loss ratios in particular

Changes in FSA reporting categories have affected accident and health ratio comparisons

Many accident and health insurers saw loss ratios increase in 2005, but a clear divide is emerging between PMI and accident insurance specialists

Norwich Union, BCWA and Legal & General all recorded double digit loss ratio growth

Stonebridge, SimplyHealth and Fortis achieved impressive loss ratio reductions

Expense ratios rose by 3.0 per cent in 2005, with accident specialists driving this increase

While PMI providers succeeded in reducing their expense ratios, accident and travel insurance specialists more often suffered an increase

PMI providers BUPA and WPA had the best expense ratios in 2005

Norwich Union, Legal & General and New Hampshire achieved the best expense ratio reductions

BCWA and Stonebridge recorded large expense ratio increases

The combined ratio of the top A&H providers rose by 5.3 per cent in 2005, with the majority of PMI and accident providers contributing to this performance

The companies with the best ratio metrics were from the accident and travel sectors, not the PMI market

New Hampshire, Fortis and SimplyHealth all made impressive combined ratio improvements in 2005

BCWA had a terrible year in 2005, however GEFI, Clinicare and Groupama all suffered big combined ratio increases as well

Liability insurers recorded improvements in profitability in 2005, as many insurers combined premium income growth with a reduction in combined ratio

Changes in FSA reporting categories have affected liability ratio comparisons

Over half of the top 20 liability insurers increased their premium income in 2005, with the majority also experiencing reductions in loss ratio

Many companies combined increases in premium income with improvements in loss ratio

Only three liability insurers saw an increase in loss ratio in 2005

The largest liability insurers generally have loss ratios of around 60 per cent, while smaller insurers have more varied loss ratios

The majority of liability insurers saw increases in their expense ratios in 2005

XL and Catlin saw the highest increases in expense ratios in 2005, while many other insurers saw smaller increases

However, a few insurers bucked this trend and managed to reduce their expense ratio

Over half of the top 20 liability insurers improved their profitability in 2005, athough reporting has had an impact on these figures

Of the top 20 liability insurers 13 returned combined ratios below 100 per cent in 2005

Some companies, however, still suffer from unprofitable liability books

Soft market conditions led to both falling premiums and reductions in profitability for many of the top 20 motor insurers

The loss ratio of the top 20 motor insurers increased in 2005 and soft market conditions were evident as many companies suffered declining premium income

Many insurers saw worsening loss ratios and reductions in income, suggesting that some have accepted reduced premiums

Three companies saw a decline in premium income but improved loss ratio

Six companies managed to improve their loss ratios while growing their motor books

First Alternative was the only top 20 company that combined an increase in premium income with a growing loss ratio

The expense ratio of the top 20 motor insurers saw a small deterioration in 2005

Only a few insurers saw substantial changes to their expense ratios in 2005

Soft market conditions led many insurers with a combined ratio already over 100 per cent to suffer further reductions in profitability

11 of the top 20 motor insurers failed to return an underwriting profit in 2005

Many companies combined increasing unprofitability with falling premium income, suggesting that some players have cut their premiums to maintain market share

11 of the top 20 returned an underwriting loss and seven of these further increased their combined ratios in 2005

Nine companies recorded underwriting profits in 2005, with five of these seeing improvements on their 2004 results

Several players have dealt well with the soft cycle so far and are set to continue riding the cycle in the future

Pecuniary loss is a profitable line with an average combined ratio below 100 per cent however, high expense ratios are a problem for a sub-group of insurer

Changes in FSA reporting categories have affected pecuniary loss ratio comparisons

In general the loss ratio for pecuniary loss is lower than other lines

The influence of the expense ratio or the loss ratio on pecuniary loss insurers' profitability varies depending on their main line of business

Insurers that mainly write personal creditor business have low loss ratios and high expense ratios

Insurers that specialize in commercial pecuniary loss generally have low expense ratios

The remainder of the top 20, with expense ratios around 40-60 per cent, underwrite a variety of pecuniary loss lines

Just over half of the top 20 pecuniary loss insurers recorded underwriting profits in 2005, making it a profitable business overall

Pecuniary loss is a profitable business for many insurers

However, a group of companies struggled to secure a profit

Property insurance operating conditions improved slightly in 2005, although many players saw their combined ratios increase

The loss ratio of the top 20 property insurers improved in 2005

Nine of the top 20 actually recorded an increase in loss ratio, with significant increases from several players

Ecclesiastical, Direct Line and Allianz all recorded large loss ratio increases

St. Andrew's and Norwich Union all achieved big reductions in loss ratio, going against the market trend of rising claims costs

Liverpool Victoria's loss ratio was the worst of the property sector's top 20 players

The expense ratio of the top 20 property insurers increased by 1.8 percentage points in 2005

Direct writers and mutual insurance companies had the best expense ratios

CIS, Royal & SunAlliance and Zurich all saw significant increases in expense ratios

Lloyds TSB and NIG achieved large reductions in their expense ratios

The combined ratio of the top 20 property insurers fell marginally by 0.4 per cent in 2005, driven by the performance of just under half of this peer group

11 of the top 20 property insurers recorded an increase in combined ratio

Reflecting softer market conditions, Legal & General moved into an underwriting loss

Direct Line, Allianz and Ecclesiastical saw the biggest increase in combined ratio

Lloyds TSB, St. Andrew's and Norwich Union all achieved double digit figure combined ratio reductions

CHAPTER 4 BENCHMARKING UNDERWRITING PERFORMANCE

Introduction

The top five liability insurers continued with combined ratio improvements in 2005 and Royal & SunAlliance was the only one to return a combined ratio of above 100 per cent

Direct Line continued to move closer to its motor insurance peers in 2005, as its combined ratio rose in a market characterised by increasingly divergent underwriting performances

Norwich Union's combined ratio improved between 2001 and 2005 to make it the best performing competitor of the top five property insurers

Norwich Union experienced improvements in the lines of liability and property in 2005

RSA managed to improve its combined ratio for liability, bringing it closer to the more stable ratios of motor and property

AXA's liability book has made the most consistent improvement over the last five years in combined ratio terms

Zurich's combined ratio deteriorated for all three major insurance lines in 2005 after a strong performance in 2004

Motor and liability profitability improved for Allianz in 2005, while its property combined ratio deteriorated

Direct Line was the top performer in 2005, recording low combined ratios in its major lines of business

CHAPTER 5 APPENDIX

Supplementary data

Definitions

Research methodology

Ratio calculations

Average of top 20 vs total top 20

Future readings

Do you need more information?

Datamonitor Financial Services Consulting

SPP writing team

List of Tables

Table 1: Total general insurance GWP by sector, 2001-5

Table 2: Combined ratio compared to GWP for the top 20 general insurers, 2004-5

Table 3: Loss ratios compared to GWP for the top 20 general insurers, 2004-5

Table 4: Expense ratios for the top 20 general insurers, 2004-5

Table 5: Management expenses ratio compared to commission ratio for the top 20 insurers, 2004-5

Table 6: Breakdown of net operating expenses for the top 20 general insurers as a group, 2003-5

Table 7: Premium income compared to loss ratio, top 20 A&H insurers, 2004-5

Table 8: Expense ratio of the top 20 A&H insurers, 2004-5

Table 9: Premium income compared to combined ratio, top 20 A&H insurers, 2004-5

Table 10: Loss ratio compared to premium income for the top 20 liability insurers, 2004-5

Table 11: Expense ratio compared to premium income for the top 20 liability insurers, 2004-5

Table 12: Combined ratio compared to premium income for the top 20 liability insurers, 2004-5

Table 13: Loss ratio compared to premium income for the top 20 motor insurers, 2004-5

Table 14: Expense ratio compared to premium income for the top 20 motor insurers, 2004-5

Table 15: Premium income compared to combined ratio for the top 20 motor insurers, 2004-5

Table 16: Loss and expense ratios compared to GWP for the top 20 pecuniary loss insurers, 2005

Table 17: Combined ratio compared to GWP for the top 20 pecuniary loss insurers, 2005

Table 18: Premium income compared to loss ratio, top 20 property insurers, 2004-5

Table 19: Expense ratio of the top 20 property insurers, 2004-5

Table 20: Premium income compared to combined ratio, top 20 property insurers, 2004-5

Table 21: Combined ratios of the top five liability insurers, 2001-5

Table 22: Combined ratios of the top five motor insurers, 2001-5

Table 23: Combined ratios for the top five property insurers, 2001-5

Table 24: Combined ratios for Norwich Union by line of business, 2001-5

Table 25: Combined ratios for RSA by line of business, 2001-5

Table 26: Combined ratios for AXA by line of business 2001-5

Table 27: Combined ratios for Zurich by line of business, 2001-5

Table 28: Combined ratios for Allianz by line of business, 2001-5

Table 29: Combined ratios for Direct Line by line of business 2001-5

Table 30: Net/gross premium ratio compared to combined ratio for the top 20 insurers, 2004-5

Table 31: Top 20 liability insurers' GWP from mixed commercial package as % of total liability GWP, 2005

List of Figures

Figure 1: Soft market conditions were evident in many lines in 2005

Figure 2: Rising expense ratios were more problematic for insurers than loss ratios in 2005

Figure 3: Many insurers saw an increased management expenses ratio in 2005

Figure 4: Many PMI players in the accident and health sector recorded an increase in their loss ratio

Figure 5: Expense ratio changes varied in the accident and health sector in 2005, but many PMI providers' ratios deteriorated slightly

Figure 6: Most liability insurers achieved improvements in loss ratio in 2005 and many also saw their premium income grow

Figure 7: The majority of the top 20 liability insurers saw increases in their expense ratios in 2005

Figure 8: The majority of liability insurers improved their combined ratios in 2005

Figure 9: Softening market conditions clearly affected the loss ratio of the top motor insurers

Figure 10: Most motor insurers saw only relatively small changes to their expense ratios in 2005

Figure 11: The four largest motor insurers have combined ratios below the top 20 average

Figure 12: Pecuniary loss insurers generally have low loss ratios, but expense ratios vary by line of business

Figure 13: On average property insurers increased premium income in 2005, but also saw their loss ratios rise

Figure 14: With the exception of a few companies like Lloyds TSB, NIG and Ecclesiastical, most property insurance providers saw expense ratios rise in 2005

Figure 15: Royal & SunAlliance was the only insurer among the top five liability insurers to return a combined ratio of over 100 per cent in 2005

Figure 16: Direct Line has had the lowest combined ratio of the top five competitors for the last five years, but is moving closer to its competitors

Figure 17: Norwich Union had the lowest combined ratio of the top five property insurers in 2005

Figure 18: Property and liability ratios have been continually improving lines for Norwich Union

Figure 19: Norwich Union managed to improve its standing in the property market in 2005, but otherwise remained a mid-performing competitor in terms of expense ratio

Figure 20: Liability profitability improved for RSA in 2005, bringing this volatile line closer to the performances of its more stable motor and property lines

Figure 21: Royal & SunAlliance's combined ratio performance is very mixed across the different lines of business, but has remained largely stable between 2004 and 2005 in relation to its peers

Figure 22: Property is AXA's only profitable line, although liability has made consistent improvements over the five year period 2001-5

Figure 23: AXA remains among the worst performers and its pecuniary loss book was the worst in class in 2005

Figure 24: Zurich's combined ratio for all three major lines deteriorated in 2005

Figure 25: Zurich's performance deteriorated in 2005, with three of its lines moving from the best performing to the mid-performing group

Figure 26: Allianz recorded combined ratios of under 100 per cent in all three lines in 2005

Figure 27: Allianz's performance improved in motor, but deteriorated significantly in property compared to its peers

Figure 28: Motor and property were both profitable for Direct Line in spite of increases in combined ratio in 2005

Figure 29: Direct Line lost its 'best in class' stars in 2005

Figure 30: The majority of the top 20 bought less reinsurance in 2005 than in 2004, although overall net/gross premium ratio decreased

Abstract

• Data and analysis on individual competitors' performance ratios in 2005 by line of business
• Analysis of the performance of markets such as liability, motor and property
• Benchmarking of the top players within and across insurance lines to identify the best performers and their most profitable lines

• Identify the consistent best and worst performers across the main insurance lines and understand the main factors driving their performance
• Learn which lines of business have been the most profitable for insurers over the last five years and benchmark yourself against your competition
• Understand at what stage of the cycle each line of business is and learn which players were dragging the market down or prolonging its recovery

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