Insurance Industry Market Monitor 2013 Issue 2
Insurance Market Monitor  Issue 2
Contents
3.
Foreword
4.
Executive Summary
5.
2012 Insurer Performance
6.
UK Top 5 Insurers
7.
UK Flood A Crunch Year
8.
Other 2013 Challenges Ministry of Justice Reforms FSA & FCA - New Regulation Broker Finance Retail Distribution Review
10. Insurer Distribution Key Account Management 11. Conclusion
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Thomas Carroll
Insurance Market Monitor  Issue 2
Foreword The Changing Insurance Market – What it means for you
Maintaining operating margin in the current economic climate is a real challenge for UK insurers and brokers alike resulting in the inevitable review of their operating costs. The structure and availability of insurance risk capacity in the UK insurance market is changing and this will affect the availability to businesses and consumers of insurance protection at competitive premium levels. This is the second of our Market Monitor insurance sector insight reports and is published at a time when the UK has lost the much valued AAA rating and at the same time the FTSE100 index is at a 5 year high and we have avoided a triple-dip recession: businesses are operating in interesting and challenging economic times. During this period of continued acute instability, the resilience shown by many markets, not least the Eurozone, is surprising many leading economic commentators.
Insurers and brokers alike are reviewing and acting to reduce their own cost base at a time when investment returns remain low and premium rates are yet to show real upward movement despite claims costs rising. The widespread weather related property damage of 2012 has impacted negatively on UK insurer results, which are now starting to be announced. UK sector analysts suggest increases in property premiums and greater selectivity among insurers particularly in areas affected by flooding. The resilience and elasticity of many insurer and broker business models are approaching their yield points: the insurance industry is operating in challenging times and the tipping point to rate increase and contraction of cover availability for some businesses and sectors are becoming more likely.
Rhys Thomas BSc (Hons) ACII Managing Director Thomas Carroll (Brokers) Limited
Central to the Group’s culture is the principal of independent advice. Chartered in both Broking and Financial Services companies, OHSAS 18001 accredited in its Health and Safety company and ranked in the Sunday Times UK 100 Best Companies to work for.
The blending of experience, expertise, market knowledge and sheer commitment underpins a service support infrastructure which is at the forefront of its sector.
The insurance sector is not immune from the continued lack of confidence, low investment and austerity measures at home attempting to reverse the high levels of public borrowing.
ABOUT THOMAS CARROLL Building on forty successful years in business, Thomas Carroll is a multi-discipline risk consultancy covering insurance, financial services, health, safety and employment law. The Group operates throughout Wales, with significant business activities across the UK and a major presence in the property risk services sector.
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Insurance Market Monitor Issue 2
Executive Summary •• Insurer performance in 2012 has underlined the fact that the soft market has bottomed out. Most insurers are looking for modest premium rate increases, with RSA Group even suggesting a double digit rise in premium levels being required.
•• 2012 saw an overall increase in insurer profitability (although, only slight) and improvements to the Combined Operating Ratio’s (COR’s) across most of the sector indicate an improvement in day-to-day company performance. Aviva’s COR improved by 1%, from 105% to 104% – “not acceptable” according to their CEO.
•• Aviva has been forced to log a £3.2bn write-down following the sale of its US division and has just off-loaded it’s Russian Life and Pension operation.
•• RSA Group have announced a reduction of a third in their 2012 year- end dividend which has not impressed their institutional investors or UK financial analysts.
•• The impact of the Lord Young report on Personal Injury Claims came into effect on 1st April 2013. This will present both opportunities for cost savings but additional administrative burden on the insurance market and in many cases, a loss of referral fee income that has historically had a positive impact on insurer performance.
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•• Economic challenges are ever present, and 2012 has seen a continuation of insurer staff cuts, downsizing and office closures as they look to slash costs from their bottom line.
•• Insurers have undertaken reviews of their distribution model in the UK market, with many withdrawing from product lines, broker-owned operations, networks and Managing General Agents (MGA’s) in an attempt to turn previous year growth drives into profitable returns.
•• Macquarie’s withdrawal from the broker finance market will inhibit consolidation and depress broker values but once again provides opportunities for those with strong balance sheets and access to capital.
•• The 2003 Statement of Principles which addressed the increasing prevalence of flood, and the rising reinsurance costs associated with rating this risk, lapses in June 2013. With the total cost of flood damage in the last 5 years in excess of £2bn and no agreement to renew or understanding with the ABI and government regarding the future management of flood risk insurance, the potential impact on the cost or availability of cover is significant.
Thomas Carroll
•• Over the last 5 years, insurers focus has been largely based on growth of Gross Written Premium (GWP). Risk improvement funding by insurers to assist reduction in claims incidents and costs has been out of favour, replaced instead with bottom line premium savings.
•• We have already seen in 2013 more appetite from insurers to provide policyholders additional funds for such loss reduction programmes, underlining insurer desire for more profitable, well managed accounts and more careful risk selection.
Insurance Market Monitor Issue 2
2012 Insurer Performance 2012 saw an overall slight increase in profitability and improvements to insurer COR’s across most of the sector indicates an improvement in their trading performance. Aviva and RSA as UK based insurers offer a good indicator of performance and trends. Aviva’s COR improved by 1%, from 105% to 104%, as the UK giant announced during 2012 plans to sell off 16 “noncore” operations in an attempt to improve profits and share price. RSA, the UK’s largest insurer, slashed share dividend payout by a third this year in an attempt to combat losses from weak investment returns – down by 11% – and the rocketing claim costs following the UK flooding and Italian earthquakes of 2012. The final dividend rested at 3.9p per share, and is expected to be cut further at the 2013 interim report. RSA are to use the annual £100 million savings to expand business into fast growing global territories, with a view to establishing increases to share dividends in line with underlying growth in UK earnings.
Streamlining company operations is being recognised as a significant key strategic plan with the dispensing of less profitable peripheral areas of business on the increase. In a challenging market, a number of insurers have taken significant steps to improving financial performance:
•• Insurers actively breaking Long Term agreements at policy level in an attempt to drive rate increase
•• Aviva sold its U.S. Life business for £1.1bn (a loss of £0.9bn) and other “red cell” disposals in Russia, Sri Lanka, and Malaysia
•• Direct Line cutting 891 jobs in a bid to save £100m
•• Redundancies across a number of insurers UK operations, including Aviva, Travellers, QBE and Merlin, as insurers restructured their regional operations
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Insurance Market Monitor Issue 2
UK Top 5 Insurers Insurer
GWP
COR
Operating Profit
Strategy
RSA Group
UK premiums up by 5% to £8.4bn, but underwriting profits down by £43m
95.4% (94.9% in 2011)
£684m (£727m in 2011)
Selective with brokers, aiming for underwriting profit, not volume. Sound portfolio management.
AVIVA
£23bn for 2012
97% (98% 2011)
£1,776m (£1857m 2011)
Narrower focus (fewer business segments), build financial strength, improve financial performance.
AXA
UK premiums up by 9% to £800m
100.2% (98.5% without flood claims)
Underlying commercial profit rose by 9% (up to £134m)
Sustainable development.
Allianz
€2,318m UK premiums
96.3%
Operating profit rose to €9.5bn (up 20.8%)
Continual risk management of business development and asset values.
Zurich
$3.55bn in General Insurance premiums
98.4% (98.9% 2011)
Operating profit $4.1bn
Corporate responsibility, sustainable value, responsibility of supply chain management.
Combined Operating Ratio (COR) is the combination of earned premium loss ratio (claims payment and claims reserves compared to premiums value received for the expired risk transfer), administration costs including staff and premises, reinsurance costs, large loss funding and distribution costs (brokerage/ fee payments). Insurers during periods of low investment return on their reserves look to an acceptable COR of <95%.
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The performance of UK insurers in terms of acceptable financial return is important as this drives their risk appetite, risk tolerance, premium levels and capacity. The majority of UK Commercial Insurance products are sourced through insurance brokers as a UK insurer distribution strategy.
Thomas Carroll
Insurance brokers and intermediaries with a proven track record of providing quality business and sustained profitable performance for insurers do receive differential and improved terms from insurers, as they focus on profit rather than turnover and review their distribution broker partners.
Insurance Market Monitor Issue 2
UK Flood A Crunch Year
Flood is regarded as a fundamental risk by the UK insurance industry, affecting widespread areas with increasing frequency and severity of financial cost. The inevitability of flood related property damage is of major concern to a UK insurance industry already struggling with low investment returns, exposure to capital market challenges and the continued impact of economic uncertainty. The recurring incidence of catastrophic floods across many parts of Wales and the rest of the UK have caused a deluge of challenges for the commercial and personal insurance sector, with the total cost of flood damage in the last 5 years being in excess of £2bn. Understanding the risks unique to your business and harnessing local knowledge and insurance market expertise in this sector are vital when dealing with flood risk – they cannot only assist in reducing insurance premiums themselves, but they mitigate the detrimental impact on earnings and reputation that flood damage and the subsequent disruption can cause. Awareness of flood risk among corporate clients and property investors has increased in recent times and due diligence around flooding has become more of a critical factor in acquiring new premises now than it ever has been. Insurers are increasingly raising the flood risk category at locations all over the UK, which has a direct impact on the value and saleability of assets – insurance is a mandatory pre-requisite of most mortgage lending and finance options.
Any hindrance in its availability could severely impede or scupper the acquisition or disposition of property. Importantly, investors need to look to their existing portfolios to ensure their current investments are sufficiently covered; a position of distance from river or coastal threat does not negate the possibility of flooding with surface runoff being an increasing cause of water damage to property assets. The majority of insurers have adopted state of the art, complex rating systems which use greater amounts of information to accurately rate flood risk for both commercial and personal property. Creeping increases for insurance premiums are now expected to rise dramatically by between 10 and 50%. In some cases we have already experienced instances of stringent conditions and total flood exclusions from some insurance policies which are only likely to increase in the coming year. As the impasse between the Association of British Insurers (ABI) and the UK Government continues and crisis talks are set to persist for the foreseeable future, insurers and brokers now urge companies to utilise risk management to maximum effect – business continuity planning and the active, continual use of risk assessment procedures are encouraged across the sector in order to minimise risk exposure and increase asset protection.
research into flood prevention and in exchange, the insurance industry were to maintain level premiums in an attempt to minimise market distortion while preserving stability, ensuring affordable access to flood insurance cover for the public and small businesses. The agreement lapses in June of 2013 with no plans to renew; as yet, the Association of British Insurers has not reached an understanding with UK Government regarding the future management of flood risk insurance. In Wales, the Assembly Government recognises the significance of developing a strong flood and coastal risk management policy with 1 in every 6 buildings being susceptible. Supported by £50million from the European Structural Funds Programme, 28 projects will be established across the nation to reduce the risk of flood, benefitting 2,700 people over the next 6 years, protecting the future prosperity of our national economy. Catastrophic flooding in the UK will continue to rise and until a solution can be found, so will the insurance premiums associated with flood risk – development of market certainty in this area is crucial at a time when the economy itself is unstable and as the time frame to implement effective changes grows shorter, the need for a swift resolution is more urgent than ever.
The Statement of Principles was established in 2003, to address the increasing prevalence of flood, and the rising reinsurance costs to the primary insurance market associated with rating this risk. This agreement outlined that UK Government were to provide funding for improved flood defences and
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Insurance Market Monitor Issue 2
Other 2013 Challenges Insurer risk appetite and their capacity to accept UK risk transfer is adversely affected by confidence and market sentiment. The economic and trading environment for insurers and brokers in the UK continues to present a number of challenges to the insurer market and impacts on insurers and brokers operational and financial performance. Confidence and risk appetite go hand in hand.
Ministry of Justice Reforms
•• Introduction of all other fixed
This includes: 1. Introduction of qualified one way costing 2. Banning of Success Fees 3. After the Event (ATE) legal expense premiums will no longer be recoverable 4. Banning referral fees 5. 10% increase on general damage awards
Following the Lord Justice Jackson Review on civil litigation and the Ministry of Justice (MoJ) consultation on the civil justice procedure, the reforms take effect in 2013 with the timetable for implementation of the reforms being staggered:
•• The introduction to the reforms of legal costs under the Lord Justice Jackson Review will be implemented from 2nd April 2013.
and reduced solicitors’ fees both in and outside the portal will be implemented from 1st August 2013
•• Introduction of reduced fixed recoverable costs in the portal will apply to motor personal injury claims up to £10,000 from the end of April 2013
•• The new protocols extending the portal scheme to £25,000 and to Employers and Public Liability claims will be implemented from 1st August 2013
The reforms represent the largest overhaul to the personal injuries legal framework in England and Wales in over a decade. The proposals will have both an operational and financial impact on insurers with savings driven by fixed and reduced legal costs and potential savings driven by the removal of certain costs. These changes are countered by the operational impact of reduced timeframes for accepting claims and the loss of income generated through traditional referral fees. Loss of income and profit from this source will see insurers likely to recover income by premium increases elsewhere.
FSA & FCA – New Regulation
•• With effect from 1st April 2013, the Regulation of the Insurance sector falls under the remit of the newly formed FCA.
•• The impact on the sector will be far felt, with the new regulator promising a far more hands on approach than the incumbent FSA – “shoot first, ask questions later” was their original statement, although more recent comments are suggested a more relaxed approach. It is fair to say the impact of the new regulator is unclear.
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•• In addition, the challenge of the Financial Services Compensation Scheme will continue to challenge brokers, with a current estimate of a £20m shortfall in funding resulting in an interim levy on the market and an estimated £22m increase in the 2013 annual levy in June 2013. According to the British Insurance Brokers Association, the current funding model treats the professional insurance broker unfairly.
Thomas Carroll
With these widespread financial and regulatory challenges throughout 2013, only those brokers that have prepared their business for these changes both structurally and culturally will be able to maintain the highest level of client service, support and advice to their clients. Those that are not prepared could find their attentions turned to internal operations rather than customer facing support, impacting on the level of service provided.
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Other 2013 Challenges Continued Broker Finance Macquarie, a market leader in providing merger & acquisition finance for the insurance industry in the broker sector has announced its withdrawal from the broker finance market. They have cited uncertainty for the broker market as the reason. The uncertainty has been caused by insurers reviewing their broker distribution strategy in the UK: which brokers they will support and allow access to insurer capacity and products. Macquarieâ&#x20AC;&#x2122;s expansion has been hampered by the low level of acquisitions in the broker market and absence of big deals. The sector has also been affected by the collapse of Riverbourne.
Macquarie is well known for infrastructure investments and had a major influence in non-consolidators coming back into the market and being involved in most deals either as a main provider or a stalking horse for other lenders. Macquarie understand the insurance broker market and provide a good indicator as to sector sentiment and confidence. They did not require the mainstream banking and were happy to provide facilities for serial acquirers.
Overall, the lack of finance will inhibit further consolidation and depress broker values but once again this provides opportunities for those brokers with strong balance sheets and access to capital.
Importantly, they were happy to do refinancing including MBIs and MBOs. They will very much be a loss to the market as a major source of funding and the message their withdrawl sends to other lenders involved with the sector.
Retail Distribution Review The FSAâ&#x20AC;&#x2122;s Retail Distribution Review has introduced sweeping changes to the investment advice market, designed to promote consumer confidence and trust in the market. This means that advisers will have to meet higher standards of qualification, keep knowledge up to date and sign up to an ethical code of practice. Traditional commission models have been replaced by agreed upfront charges, including charges for any on-going services.
Whilst at present this only applies to the investment advice market, the review is also looking at the General insurance sector. Although no reforms are expected until at least 2019, the future uncertainty is causing many insurers and brokers to review their income models with one eye on the future. This has also had some impact with negative sentiment with broker finance.
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Recently we have seen HSBC announce the restructure and staff cutbacks across the UK from their Wealth Management operations citing professional compliance and regulation as a driver of these changes.
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Insurance Market Monitor Issue 2
Insurer Distribution Distribution of insurance capacity and products in the UK market is complex, dynamic and inconsistent. Insurers control distribution and they are basing their decisions on where and when they allow risk transfer capacity based on realistic prospect of profitable return based on both risk profiling and distribution business partners: broker choice is now becoming more of a critical consideration as insurers strive to improve their financial performance. Not all brokers offer the same expertise, professionalism and sector knowledge which are now recognised as having influence on profitable account performance.
Through the boom years of broker acquisitions, many insurance companies acquired broker businesses to control distribution and offer them a B2C solution for their products. These attempts have been largely unsuccessful with many insurers retreating from this sector. In 2012 we have seen:
•• RSA disposal of Fyffe to Aston Scott following their decision to withdraw from the motor trade market.
•• Groupama sale of Bollington •• IAG’s sale of Barnett and Barnett and NBJ
•• Ecclesiastical sale of South Essex Insurance Brokers.
In 2012 it became apparent that insurers’ appetite for pure premium growth has been replaced by a need to focus on profit. During 2012 and into 2013 we have seen:
•• Insurers actively breaking Long Term Agreements at policy level in an attempt to drive rating increases
•• AVIVA withdrawing from Broker Network and Willis Network arrangements
•• AXA withdrawing from Towergate’s Household Managed General Agency (MGA)
•• Ecclesiastical withdrawing from the motor fleet market
•• RSA Group withdrawing from the motor trade market
Key Account Management Insurers are looking carefully at their Key Account insurance broker partners as part of their distribution decisions and the management of their network of brokers and intermediaries. Key Account Management (KAM) is seen as a route to profitable key supplier status for insurers with their broker partners and insurers see KAM as much concerned about the future as it is the present.
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Insurers are increasingly saying that strong business relationships with independent brokers and intermediaries lead to vital exchange of information, understanding, trust and confidence leading to added value services. This works in favour of broker clients where insurers differentiate their product offering by broker source of enquiry. Key Account Management by insurers considers business attractiveness in
Thomas Carroll
terms of size (volume, value, profit and opportunity), growth potential, financial stability, ease of access and closeness of relationships, strategic fit, market standing and professionalism. Distribution decisions by insurers and Key Account Management operate together and ultimately broker clients benefit where insurer and broker distribution relationships are strong and profitable.
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Conclusion
Change is constant and in our opinion 2013 and the immediate future will see structural reform of UK broker distribution following a review by UK insurers. Since our Market Monitor issued in 2012, the financial services sector has faced operational and reputational challenges around LIBOR, PPI and their apparent lack of support for UK business as the banking sector particularly seek to strengthen their balance sheets to meet regulatory requirements. This structural reform and the new regulatory regime through the FCA and RDR is forcing change and the requirement for proven professionalism in the finance sector is placing heavy demands on many organisations including insurance brokers and intermediaries.
Chartered status among insurers and broker was previously seen as optional: this professional standard is now being actively promoted by the Chartered Insurance Institute (CII) and the Association of British Insurers (ABI). There are real indications of a flight to quality in terms of insurer choice of supply chain business partners able to offer added value and profit: sustainable profitable performance being the key driver to insurers UK distribution and their decisions as to where, when and to whom their finite risk capacity will be made available.
In our opinion, Chartered independent brokers will continue to demand the attention and support of the UK insurance markets and its capacity for the benefits of their clients.
This change in distribution strategy, coupled with challenges in the financial markets for some broker models, means that UK Business and consumers need to consider their broker appointment carefully. Not every broker will be in a position to offer choice of market and drive competition amongst insurers.
FEEDBACK Rhys Thomas Managing Director of Thomas Carroll (Brokers) Limited invites feedback and comment regarding this report. Please email rhys.thomas@thomas-carroll.co.uk
Disclaimer:
Sources:
This publication represents a market overview and cannot be
2012 Annual Reports (RSA, Aviva, Allianz, AXA, Zurich)
relied on to cover specific situations, application of the principles
Fidelity World Wide Investment
set out will depend upon the particular circumstances involved
CASS Business School Post RDR Landscape, (January 2013)
Thomas Carroll Group plc
and we recommend that you obtain professional advice before
Daily Telegraph, (March 2013)
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acting or refraining from acting on any of the contents of this
Insurance Times, (February and March 2013)
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publication. Thomas Carroll Group would be pleased to advise
Reinsurance Magazine, (February 2013)
readers on how to apply the principles set out in this publication
Association of British Insurers (ABI), (March 2013)
Contributors:
to their specific circumstances. Thomas Carroll Group accepts
Tony Cornell Consulting, (2013)
Michael Learoyd FCII Chartered Insurer Pg MM MIRM Head of Property
no duty of care or liability for any loss occasioned to any person
Sunday Times, (March 2013)
Gareth Cotty ACII Chartered Insurance Broker Director
acting or refraining from action as a result of any of the material
DEFRA, (February 2013)
Louise Jones LLB (Hons) Cert CII Broking Executive
in this publication.
POST Online, (February 2013) National Flood Forum, (February 2013)
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