The B2B insurance market was estimated to have achieved gross written premiums of £14.7 billion in 2014, representing an increase of £175 million (1.2%) over the previous year and a decline of £106 million (0.7%) compared to 2010. The annual rate of change has fluctuated between -2.6% and 1.4% since 2010 and can be partly attributed to the economic climate, which has led to varying insurance industry and underwriting cycles.

Figure 1: The UK Market for Commercial Insurance, in Gross Written Premiums, 2010-14

(£ Million)

Click here to zoom

Source: MBD analysis of ABI data and MBD estimates for 2014

Liability insurance premiums accounted for the largest proportion of the UK market throughout the majority of the review period, except in 2010 when property premiums were higher (£4.56 billion compared to £4.45 billion). However, the proportional importance of liability insurance has declined over the last five years from 30% in 2010 to 28% in 2014 as premiums decreased by £379 million. Motor insurance premiums experienced the greatest increase over the last five years, rising by 17% from £2.87 billion in 2010 to £3.36 billion in 2014, although they did fall marginally in 2013 before the anticipated recovery to a review peak value in 2014.

Figure 2: UK Commercial Insurance Market, by type, 2010 and 2014

(% Share of Overall Market)

Source: MBD analysis of ABI data

Independent intermediaries, particularly national brokers, accounted for the majority of commercial lines premiums collected in the UK over the five-year review period to 2013. However, this share has declined from 83% of collections in 2009 to 79% in 2013.

Figure 3: UK Commercial Lines General Insurance, by distribution channels, 2009-13

(% of total)

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Source: MBD analysis of ABI data

More personal line motor insurance providers are entering the commercial sector, increasing competition in the market and leading to an ever-increasing range of coverage options in policies. In 2009, commercial motor gross written premiums declined by 8% to £2.7 billion following the onset of the recession. However, in the following four years, gross written premiums (GWP) experienced annual growth levels of between 2% and 14%, reaching a review period peak of £3.4 billion in 2013 - an overall increase of 27% since 2009.

Figure 4: UK Commercial Motor Insurance Market Size, by Premiums, 2009-13

(£ Million)

Source: MBD analysis of ABI data

In 2013, the commercial sector accounted for 16% of the overall motor insurance market for fraudulent claims - down from 23% in 2009. This implies that the recent anti-fraud measures imposed in the industry, including the development of software and databases to improve core risk underwriting and systems to detect false or inflated claims, have had a positive impact on the commercial aspect of the industry.

Commercial property gross written premiums fell by 8% in 2009 following the financial crisis. Premiums then recovered to just over £4 billion in 2010, before experiencing two consecutive declines of 8% in 2011 and 1% in 2012. Premium values then rebounded in 2013, increasing by 9% to £4.03 billion. This was due to higher claims relating to the severe weather in 2012, but was still below the review high achieved in 2010.

Figure 5: UK Commercial Property Insurance Market Size, by Premiums, 2009-13

(£ Million)

Source: MBD analysis of ABI data

Liability claim volumes are highly exposed to economic, social and legal dynamics, which can lead to unexpected additional costs for insurers. It can take years to reach a final settlement and the variables determining the final claims payable often change between the underwriting of a policy and the settlement. This was shown by liability gross written premiums declining over each year between 2009 and 2013, falling by a cumulative 12% to just less than £3 billion.

Figure 6: UK Liability Insurance Market Size, by Premiums, 2009-13

(£ Million)

Source: MBD analysis of ABI data

The largest commercial health insurers have adopted a ‘modular’ approach to prize away corporate PMI market share, now allowing businesses of all sizes to pick and choose which elements of cover they take up based on their needs and budget. Gross premiums earned by the corporate PMI market increased by 10% over the review period, from £1.9 billion in 2010 to an estimated £2.1 billion in 2014. The market grew moderately in each year up to 2012, before declining by 1.4% in 2013.

Figure 7: UK Corporate PMI Market Size, by Gross earned premiums and Average Annual Premium per Subscriber, 2010-14

(in £ Million and Average in £)

Source: MBD analysis of ABI data and MBD estimates for 2014

There has been a visible trend towards self-insurance among larger companies in recent years, with employers setting up healthcare trust funds to pay medical costs. The latest data from the ABI reveals that the number of subscribers increased by 17% between 2009 and 2013, with 718,000 subscribers and 1.3 million people covered in 2013. MBD expects healthcare trust schemes to continue to gain in popularity in the coming years, with large companies able to cut costs by avoiding payment of Insurance Premium Tax, currently at 6%, on PMI premiums by self-insuring.

Both the marine and aviation insurance markets have expanded over the past few decades, although their growth rates have not correlated. The cost of aviation insurance increased dramatically after the terrorist attack on September 11 2001, before gradually declining as insurers’ appetite for aviation risks fell and then recovered. Marine, Aviation and Transport (MAT) gross written premiums decreased by 3% in 2009, before increasing by £270 million to 2011. However, premiums then significantly fell by £500 million to a five-year low of £2.4 billion in 2013.

Figure 8: UK MAT Insurance Market Size, by Premiums, 2009-13

(£ Million)

Source: MBD analysis of ABI data

Trade credit gross written premiums declined in value in the three years after the onset of the global recession by £37 million to £273 million in 2011. Premiums then increased by £165 million over 2012 and 2013 to £438 million, and this trend is estimated to continue to 2014 with a further 18% increase. Despite declining premiums between 2010 and 2011, trade credit GWP accounted for an increasing share of the total commercial pecuniary loss market - from 27% in 2010 to an estimated 44% in 2014.

Figure 9: UK Trade Credit Insurance Market Size, by GWP and share of commercial pecuniary loss market, 2010-14

(£ Million and %)

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Source: MBD analysis of ABI data and MBD estimates for 2014

In addition to the general impact of the recession and subsequent recovery, insurers have had to navigate around the historically and unexpectedly low interest rates that have remained constant for nearly six years. This has played a huge role in determining the return on investments made by insurance companies and has contributed to poor underwriting results in several areas. Insurers have paid out more in claims than they have received in premiums due to the lower capital amounts accumulated by investments and lower income levels generally.

Insurers must acquire and retain customers whilst simultaneously improving their customer experience. This is especially difficult to achieve during soft markets when customers are able to negotiate lower insurance prices, sometimes at below cost, as insurers are made to compete for fewer potential buyers. Insurers must also deliver good customer service when claims need to be settled. Companies cannot grow at the expense of client satisfaction and yet must be able to manage, process and analyse insurance market data to ensure the utmost accuracy in claim and payment processing to reduce fraud and their own costs.

In spring 2014, the Law Commission published proposals for the much-needed reform of the Marine Insurance Act, which has provided the default regime for commercial insurance contracts since 1906. Its key provisions included adding the following areas to law: ‘duty of disclosure’, ‘breach of warranty’, ‘basis of contract clauses’ and ‘remedies for fraudulent claims’. The EU Standards include the upcoming implementation of the Solvency II Directive. This is intended to introduce more sophisticated and risk sensitive standards to capital requirements for insurers to ensure sufficient capital is held to protect policyholders. One of the main aims of Solvency II is to contribute to the objectives of the EU Financial Services Action Plan (FSAP) by encouraging a deeper single insurance services market that enables EU companies to operate with a single license throughout member countries. Implementation has been delayed on several occasions, but has most recently been given a start date of 1 January 2016.

The London Market Group estimated in November 2014 that 10% of the world’s commercial insurance and 13% of reinsurance policies are underwritten in London - making the market the same size as its three closest competitors, Bermuda, Singapore and Zurich, combined. However, the London market primarily deals with risks outside of the UK and when calculating home-foreign business, the UK had the world’s second largest commercial insurance market in 2010. On the other hand, emerging markets accounted for 43% of global growth in the industry over the last three years with China growing by 18% annually over this period, while London could only capture 0.5% of that growth. London’s share of emerging markets fell from 3.2% in 2010 to 2.5% in 2013, which highlights the potential struggle the city has in holding onto its status.

The structure and availability of insurance risk capacity in the UK B2B insurance market is changing, which will affect the availability of insurance protection to businesses at competitive premium levels. Over the last five years, insurers’ focus has been largely based on the growth of gross written premiums. Risk improvement funding by insurers to assist reduction in claims and costs has been out of favour, replaced with bottom line premium savings.

Insurers are starting to show their competency in deploying resources in response to crises and delivering new products and services with speed and accuracy. This is largely due to the expansion in companies offering their services via online tools instead of solely through older and more traditional methods - such as a personal meeting between a business client and insurance provider or a phone call.

Streamlining company operations as a key strategic plan, with the dispensing of less profitable peripheral areas of business, has become more commonplace in the sector. In a challenging market environment, a number of insurers have taken significant steps to improving their financial performances, such as Aviva selling its US life business for £1.1 billion (at a loss of £0.9 billion) and other operations in Russia, Sri Lanka and Malaysia during 2013. Redundancies have also been made at several UK-based insurers over the last few years, including Aviva and QBE, as they restructure regional operations and cut costs.

M&A activity is still adapting to the withdrawal of Macquarie in late 2012 from providing merger and acquisition finance in the broker sector, where it was a market leader. The company cited uncertainty in the market’s future as insurers review their broker distribution strategies and the brokers they support and allow access to capacity and products. The lack of finance has inhibited further consolidation and has depressed broker values, but has opened up opportunities for those with stronger balance sheets and access to capital.

Commercial GWP expected to marginally climb over the next five years, but the current drivers of economic growth cast doubt over further developments in the industry since macroeconomic conditions are unlikely to drastically change

The outlook of the commercial insurance industry is brighter than it has been over the last five years due to improving economic conditions, the introduction of new regulations that will ensure more efficient operations, and expected interest rate increases over the next few years. However, 2015 and 2016 are forecast to see smaller levels of GWP development in the sector as the UK economy is expected to grow at slower rate than in 2014. B2B insurers will have made fairly large gains in 2014 and the previous soft market climate may harden, leading to firms encountering rising premiums and steady rate increases that they may not be able to afford.

Figure 10: UK Market Forecast for Commercial Insurance, in GWP, 2015-19

(£ Million)

Source: MBD forecasts

The impending regulation changes, especially the implementation of the EU-wide Solvency II from the start of 2016, will change the fundamental structure of the industry. Insurers that have already developed and embedded effective risk management into their business models will be able to immediately demonstrate to management and regulators that they have sufficient regulatory and internal risk management controls to help control the industry’s risk profile. The Solvency II framework will also require more complex and extensive analysis, as well as a more systematic approach to risk management, which is likely to increase demand for workers that can carry out these roles.

The upcoming year will be pivotal for most B2B insurers as they strive to make sure that they are fully compliant with Solvency II regulations by the time of its implementation in January 2016. The extent of digitisation and the adoption rate of big data analytics into the industry will play a role in determining the success in meeting the proposed components of the framework. By following the stringent new regulations, some insurers may find that the capital reserves they put aside for certain B2B lines may be so vast that they are no longer commercially viable, which could lead to several companies exiting specific markets. Since the majority of B2B insurance deals are collected via brokers, this creates an opportunity for the broker market to justify its importance to the sector and display its expertise as a service provider. Brokers will have to persuade insurers that they should reconsider providing business lines previously written off as unprofitable - since they may be able to deliver above average returns.