MOTOR INSURANCE MARKET BACKGROUND
TO THE UK
market for motor
insurance is the largest of any class of general insurance, generating
premium income of £12.6 billion for insurance companies and Lloyd’s
Risks Premium Income 2002 (£bn) Gross Written Premiums
Accident & Health 5.4
Competition continues to change the UK
1931, it has been compulsory for any individual driving a motor
vehicle on the roads to take out insurance to cover any costs that may
arise from an injury caused to other people or damage to their property.
Private insurance companies have been charged with the provision of motor
insurance, since 1968 without any pricing restrictions, based on the
assumption that competitive
provision will lead to better value, lower costs and improved service to
the driving public.
Individual insurers compete to improve efficiency and service.
2002, there were over 350 insurance companies’ authorised to write motor
business, though in practice only around 65 companies plus 11 Lloyds
syndicates actively transacted business. Insurance companies accounted
for 88% of the total market for motor
insurance, with Lloyd’s accounting for the remainder.
2002, the largest ten insurance companies in the motor
market (excluding Lloyd’s) had a 67% share. Direct Line now has the
largest private customer base, overtaking Norwich Union. Allianz
Cornhill has left the top 10 insurers of private vehicles, by premium
income, following a decline in its private vehicle exposure. Merger and
acquisition activity confirms the picture of a competitive industry
constantly subject to change, with Royal Bank of
buying Churchill to go with its already significant presence in the
industry in the form of Direct Line.
Table 2: Top ten motor insurers for private motor risks by gross earned premium and vehicle exposure, 2002 (and 2001)
Line Group 1,590,964
& SunAlliance 573,403
Source: Standard and Poors
the commercial vehicle sector (excluding Lloyd’s), Highway have
significantly reduced their vehicle exposure thus falling out of the top
10, whilst simultaneously increasing their premium income, though not by
enough to see them become one of the largest 10 by premium income.
Table 3: Top ten motor insurers for commercial risks by gross earned premium and vehicle exposure, 2002 (and 2001)
& SunAlliance 501,810
Standard and Poors
has intensified in the private market since the launch of direct writing
nearly 20 years ago. The most high-profile recent entrant is Esure,
backed by HBOS, which started trading in motor
insurance in 2001. Whilst the overwhelming majority of policies
are still sold by insurance intermediaries, since 1985, direct selling
over the telephone, and now the internet, has grown rapidly.
Increasingly customers are more prepared to “shop around” themselves
(rather than leave this to insurance intermediaries) to take advantage
of the competitive deals on offer. Almost a half of all private motor
are now sold directly, an increase of almost four percentage points on
the last year alone.
4: Sources of Private Motor
Premiums: Distribution Channels Market Share 2001 2002
well as a shift towards direct sales, there has also been increased
sales activity by Retailers/Affinity Groups, where high street brands
are extended to new services e.g. Tesco.
These brands tend to sell directly to customers with insurance
products underwritten by major insurance companies. In response,
insurance intermediaries are increasingly developing stronger brands
themselves in order to gain market share and compete against their
competitors e.g. AA.
changing way in which insurance is sold gives a further example of how
the pressure on margins is forcing the industry to become even more
competitive and efficient. The emergence of selling insurance direct via
the telephone and internet has a number of potential benefits for the
insurer, who has direct control over the sales process and is able to
transmit product changes immediately. Recent figures suggest that for
the first time the advertising spend per customer on the internet has
fallen beneath that for a telephone customer. By selling through a
number of different mediums motorists are given a range of options from
where they can purchase competitively priced insurance.
increased use by motor
insurers of partnerships with large retailers, banks and building
societies to advertise and promote products through their network of
outlets also highlights a growing realisation on the part of the market
that it makes sense to make use of strong
existing retail brands, with the resultant cost-efficiencies that
can be passed onto consumers.
in some other European markets bancassurance has not taken off at the
customer facing level. This can largely be explained by the nature of
the customer/bank relationship in the UK,
where consumers are much less likely to visit their bank branch
regularly (unlike on the continent). In the background however, banks
are a significant force in the motor
insurance market through ownership structures including
Direct Line and Churchill owned by RBS (Royal Bank of Scotland) and
Esure, which is owned by HBOS (Halifax Bank of
In the private and commercial motor
consumers accounted for 74% of the UK
insurers’ gross motor
insurance premium income in 2002, with commercial motor
business accounting for the remaining 26%.
Commercial business covers fleet vehicles, company cars, goods
vehicles, agricultural vehicles, motor
traders and hire vehicles. Although commercial business accounts for 26%
of premium income, it accounts for just 17% of the vehicles
insured in the UK,
representing the higher average cost to insure a commercial vehicle.
Table 5: Comparison of Private and Commercial Motor Business 2002
21,245,000 - 4,456,000
Earned Premiums (£000)
£ 356.5 -
15.7 – 19.8
£ 1,705 - 2,157
Standard and Poors, Lloyds members are not included
higher average cost of insurance for commercial vehicles can be
explained by a combination of their greater exposure to risk as measured
by their higher average value, higher mileage and likelihood of causing
With insurers innovating to improve profitability while lowering
addition to the increased routes for consumers to purchase insurance
cover, the products themselves are becoming more diverse as consumers
attempt to make the benefits offered more tailored to the needs of the
consumer. The menu of benefits on offer include different levels of
excesses, the provision of replacement vehicles, higher quality claims
handling services, a choice of vehicle repair parts and methods and
cleaning of repaired vehicles before their return.
offerings are also emerging to cater for specific markets, with firms
using their particular experience and expertise to produce good value
products tailored to smaller groups of consumers e.g. women or over 55s.
Insurers are also experimenting with new technology.
example, one company is currently piloting a “pay as you go” motor
insurance scheme, which may allow the risk paid for through premiums to
be tailored even closer to the individual consumer.
insurance is a significant purchase for many households. Annual average
household expenditure on motor
insurance in 2001/02 for those with some expenditure on motor
insurance was £481 (this may include more than one vehicle
and so is higher than the average motor
insurance premium). At just 12% of all household expenditure on motor
related expenses, insurance was the third largest item, with
the purchase cost of the vehicle the largest at 44% and fuel costs the
second largest at 25%.
1: Breakdown Of Spending On Motor
Diesel And Other Motor
Returns on capital from motor
insurance are generally low…
insurance market is a mature, commoditised market, where we would not
expect supernormal profits but a reasonable return on capital. The
underwriting result is the most commonly used measure of the performance
of the insurance industry. Despite average premiums for both
comprehensive and non-comprehensive cover increasing by 71% since 1996,
insurance sector as a whole has only achieved underwriting profits in
two of the last ten years.
this time some individual companies have regularly made underwriting
profits, while other firms, through profitable investment returns have
made profits overall.
cost pressures have led to motor
insurance premiums rising over the past five years at a significantly
faster rate than inflation. While premiums have risen steadily since
1995, the growth in premiums has been outstripped by the growth in
outgoings (both claims and administration). As a result, the
underwriting result (or profit/loss before investments) for the market
as a whole has remained negative i.e. a loss for most of the period.
feature of the market over recent years has been the “insurance
cycle”. This has seen companies writing business with very low
margins, sometimes even making a loss, just to increase market share.
Inevitably, there comes a point when insurers are forced to raise prices
in order to counteract their poor underwriting result.
we would now expect to see growth in premiums slow, increasing the
deficit between net written premium and outgo, as companies strive to
achieve growth in market share.
Insurance Premium Changes
costs (relating to personal injury compensation, vehicle accident damage
and theft of, or from, vehicles costs) are a major determinant of
premiums and the underwriting result.
cost of all motor
claims has risen by almost 22% since 1999 from £6.8 billion to £8.3
billion in 2002; this cost is driven by the number of claims and their
average cost. The number of accidents and theft incidents are the main
determinants of the number of claims, while the average cost is driven
by the value of vehicles, cost of replacement parts and labour, and the
levels of damages awarded to injured parties in court.
recent demise of a number of high-profile accident management companies
may be good news for policyholders. These organisations brought large
volumes of, sometimes spurious, claims for their clients. By advertising
to seek damages they encouraged the growing “compensation culture”
that can be already be seen in the US. However, their demise also
presents a challenge to insurers to make sure that all legitimate
claimants are able to have their claims assessed quickly and
further new development has been the new legislation relating to fixed
legal fees for road traffic accidents. This came into effect on 6
October 2003 and should help to reduce legal costs faced by insurance
companies in relation to contested claims.
One final method in which insurers are seeking to help claimants
is through the development
rehabilitation programmes. These assist the affected person by providing
treatment, training and skills to people who are unable to continue in
their current profession due to the injuries that they have sustained.
Due to the emerging nature of these plans, more work will need to be
done to develop an evidence base of success to see the true benefits
that these efforts yield.
6: Key facts affecting the costs of motor
of Cost Trend Source
Number of thefts: Rate of vehicle theft halved since 1995.
theft costs have fallen by almost 8% since 1995 to £563m in 2002. “Crime
in England and Wales 2002/03” Home Office/ ABI
Casualties in Great Britain: Annual Report 2002”, DfT Cost of
1995 and 2003, the average cost of new cars fell by 11% and used cars by
26%, while spare parts and windscreens rose by 21% and 9% respectively (RPI
rose by 22% over the same period).
Statistics Personal injury claims
have risen by 3-4 times the general rate of inflation over the past few
years. A reduction in the discount (Ogden) rate has increased the level
of compensation payments needed for long-term injuries. ABI
IUA Bodily Injury Survey
Insurers are helping to bring down uninsured driving…
competitive insurance market works hard to ensure that insurance
premiums are always kept down to the minimum possible level. As well as
the traditional incentives used to encourage safer driving and more
responsible vehicle ownership – thus lowering claims costs – through
product features such as no claims bonuses, insurance companies are also
looking to reduce the cost of uninsured driving.
insurers set up the Motor
Insurers’ Bureau (MIB) to compensate the victims of uninsured and
‘hit and run’ motorists, thus ensuring all victims of accidents
caused by motorists receive adequate compensation. Motor
insurers provide all of the funding for the MIB with a levy from
insurers writing motor
premiums, this levy covers all third party property and personal injury
claims where the motorist liable was (illegally) not insured and
personal injury claims
where s/he cannot be traced.
2002 the MIB levy amounted to around £250 million, of which almost £210
million was paid out to victims or uninsured or untraced drivers. While motor
insurers bear the direct cost of uninsured driving it is the honest
motorist, though their motor
premiums that bears the cost of uninsured driving. Insurers themselves
also meet certain claims including injury or damage caused by uninsured
drivers. The MIB estimate that the costs add up to
£30 to the average motor
insurance industry is playing its part to try to reduce the incidence of
uninsured driving including the establishment of the Motor
Insurance Database (MID). Run by the Motor
Insurers’ Information Centre (MIIC), all motor
are registered on the MID with details of the individuals or firms and
their vehicles that are insured. Police are able to check the MID for
the presence of a vehicle or driver (and thus check their insurance
status), any unlisted vehicles can be stopped by police with a much
higher probability of catching uninsured
research commissioned by the ABI has found that 7% of people admit to
having made some sort of fraudulent claim to an insurer. Almost half of
those individuals surveyed would not rule out making a fraudulent claim
at some time in the future. ABI estimates that fraudulent claims on motor
and household policies
alone cost insurers £1 billion a year (around 7% of claims costs).
Fraudulent claims are thought to make up around 10% of all
insurance industry operates databases that are designed to lower cost of
fraud on the honest motorist. The Motor
Insurance Anti Fraud and Theft Register (MIAFTR) and Claims and
Underwriting Exchange (CUE) are two of the industry’s databases aimed
at combating fraud. Both aim to reduce fraud by allowing insurance
companies access to linked claims data, highlighting multiple claims by
any individual, and thus potential fraud.
The changing dynamics of the market is a good sign of how motor insurers, working in a win-win partnership with their customers, claimants and the Government, can provide an efficient, competitive and fair dealing market for the legally required motor insurance product. The willingness of motor insurers to evolve and deal with the challenges as they appear is certain. As is the fact that consumers will continue to enjoy reliable and affordable motor insurance.
UK VEHICLE INSURANCE ONLINE A - Z
No matter what car, van or bike you drive, we're all looking for great value and quality in our UK motor insurance? But who is the best - who is the cheapest and who offers the great service in the event of a claim?
See the insurance companies below who claim to offer competitive cover at sensible prices, our guide to the jargon and tips for cutting your quote - Good Luck:-
US AUTO INSURANCE A - Z
Shopping for car insurance (often referred to as ‘motor insurance’) has traditionally been a painstaking but necessary task. From fully comp to third party, finding the right deal from numerous UK car insurance companies can prove to be an overwhelming challenge using a telephone. However, there’s more to a search than just finding cheap car insurance. You need to ensure you get the cover to suit your needs as a motorist and to understand some of the terms used. Here are some factors you should consider:
A - Z DIRECTORY of MOTOR MANUFACTURERS
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