B2B Insurance - UK - January 2016
Executive Summary
 
“Business interruption, supply chain concerns, loss of reputation or brand value, and data breaches or other cyber crimes offer the biggest threat to companies and provide insurers with numerous development opportunities. Businesses and insurers both have an important role to play in adapting to and meeting the challenges ahead. Businesses must continue to strive to have a good understanding of their exposures and robust risk management, while insurers must provide comprehensive and adequatelypriced risk transfer when required.”
-Lewis Cone, B2B Analyst

Market size 
The B2B insurance market is estimated to have achieved gross written premiums of £15.2 billion in 2015, representing a marginal increase of £225 million over the previous year and a cumulative £747 million increase compared to 2011. The annual rate of change has fluctuated between -1.7% and 1.5% since 2011, partly due to the economic climate, which has led to differing insurance industry, or underwriting, cycles.

FIGURE 1: The UK Market for Commercial Insurance, in Gross Written Premiums, 2011-2015
 
(£ Million)
 
Source: MBD analysis of ABI data and MBD estimates

Liability insurance premiums accounted for the largest proportion of the UK market in 2011 and 2012 at a respective £4.49 billion and £4.46 billion. As insurers adapted to and offset the previous threat of industry deafness claims, the sector’s market share declined from 30% in 2012 to an estimated 27% in 2015. Property insurance premiums overtook liability insurance as the dominant industry sector - maintaining its market share of 28% over the last five years.

FIGURE 2: UK Commercial Insurance Market, in GWP, by Insurance Type, 2011 and 2015
 
(% Share of Overall Market)
 
Source: MBD analysis of ABI data and MBD estimates

Market trends
Independent intermediaries, particularly national brokers until the change in classification in 2013, accounted for the majority of commercial lines premiums collected in the UK over the five-year review period - albeit at a declining proportion since it made up 83% of collections in 2010, but 78% by 2014.

FIGURE 3: UK Commercial Lines General Insurance, by Distribution Channels, 2010-2014
 
(% of Total)
 
Source: MBD analysis of ABI data

According to Swiss Re, the UK oversaw three annual increases in direct premiums written in the non-life insurance market between 2012 and 2015 - with 2013 providing the only year where direct premiums written fell (by 1.8%). Globally, real growth rates have declined from 3.2% in 2013 to 2.5% in 2015.

FIGURE 4: Real Growth of Direct Premiums Written in Major Non-Life Insurance Markets, by Country, 2012-2015
 
(%)
 
Source: MBD analysis of Swiss Re Economic Research & Consulting data

Commercial property gross written premiums increased by 2% in 2010 following a steeper 8% decline in the previous year. However, premiums then experienced two consecutive 1% declines in 2011 and 2012, before rebounding in 2013 to a review high of £4.31 billion, and then declining again in 2014 to £4.2 billion.

FIGURE 5: UK Commercial Property Insurance Market Size, by Premiums, 2010-2014
 
(£ Million)
 
Source: MBD analysis of ABI Income and Outgoing Payment data

Liability gross written premiums (GWP) declined over each year between 2010 and 2014 by a cumulative 12% to just more than £4 billion. However, GWP then increased by 4% to £4.2 billion in 2014. The liability insurance industry made underwriting profits in 2010, but fairly significant underwriting losses in the other years of the review period at between £110 million and £826 million, following a surge in the number of industrial deafness claims.

FIGURE 6: UK Liability Insurance Market Size, by Premiums, 2010-2014
 
(£ Million)
 
Source: MBD analysis of ABI Income and Outgoing Payment data

MBD expects healthcare trust schemes to gain in popularity over the coming years. Large companies are now able to cut costs by avoiding payment of Insurance Premium Tax, which currently stands at 9.5% - up from 6% from 1st November 2015, on PMI premiums by self-insuring. The ABI states that at least £40 will be added to the average PMI premium cost. Healthcare trust schemes are competing with corporate PMI providers, but they also represent an opportunity to insurers, who are often relied on to manage such programmes.

FIGURE 7: UK PMI Healthcare Trust Market Size, by Number of Subscribers and Number of People Covered, 2010-2014
 
(in 000)
 
Source: MBD analysis of ABI PMI data

Both the marine and aviation insurance markets have declined over the last few years, while transport insurance GWP demonstrated growth over four of the five years between 2010 and 2014. Overall, marine, aviation and transport (MAT) gross written premiums increased by 10% in the first two years of the review period to a five-year high of £2.87 billion in 2011. However, GWP then fell by £880 million to end the review period at a five-year low of around £2 billion in 2014.

FIGURE 8: UK MAT Insurance Market Size, by Premiums, 2010-2014
 
(£ Million)
 
Source: MBD analysis of ABI Income and Outgoing Payments data

Market factors
Rise in insurance premium tax could dampen market growth
In the July 2015 Budget, the chancellor announced that insurance premium tax (IPT) would rise from 6% to 9.5% from November 2015. This represented the first significant rise in the standard rate of this tax since 1996, with will impact all insurance customers. The BIBA criticised the move, labelling it as a ‘stealth tax’ on insurance policies that will affect millions - despite the chancellor suggesting that it would only affect a fifth of all premiums.

This move has increased the cost of insurance policies on or after 1st November 2015, which may encourage customers to avoid becoming insured as it is too expensive. Customers may instead choose to reduce cover or decide to have no cover at all.

Outcome of forthcoming EU referendum will affect UK industry’s global position
The prime minister David Cameron has pledged to hold a referendum on the UK’s EU membership by 2017. EU membership allows UK businesses the right to trade freely across the entire EU market. Should the UK decide to leave the EU, UK insurers may be required to establish EUdomiciled subsidiaries or branches to underwrite business in the respective territories. This will have significant cost and resource implications, and increases the likelihood of insurers relocating from the UK to EU member states. Many large nations, such as the US and China, view the UK as a direct platform for trading in the EU. This perspective could dramatically change if the UK revokes its EU membership. If access for UK insurers is reduced or denied, many business opportunities will become unavailable and investment in the UK insurance industry will decline.

The current macroeconomic environment has challenged the performance of B2B insurers
In addition to the general impacts of the recession and subsequent recovery, insurers have also navigated the unanticipated continuation of historically low interest rates, which have remained constant for nearly seven 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 - due to the lower capital amounts accumulated by investments over recent times. When combined with lower income levels in general, insurers have paid out more in claims than received in premiums.

The introduction of the Insurance Act 2015 and Solvency II this year will change the operational structure of the industry 
In 2006, the Law Commission was asked to consider the existing insurance law regime in the UK and whether the Marine Insurance Act was still fit for purpose in the modern insurance market. The commission concluded that the current law is outdated and, as a result, the Law Commission published The Insurance Bill 2014, which was first put before parliament in July 2014. The bill received Royal Assent on 12th February 2015 to become the Insurance Act 2015, but most of its provisions will only enter into force on 12th August 2016 to allow the market time to adjust its practices. For commercial insurance, the changes introduced are a default regime. If insurers propose to alter the default regime with any term that would have a disadvantageous impact on the insured, the term must be sufficiently drawn to their notice. It will not be possible to contract out of the law concerning basis clauses, which are now effectively outlawed in either commercial or consumer contracts.

EU standards include the recent implementation of the Solvency II Directive from the 1st January 2016. This directive intends 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.

Companies
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.

Streamlining company operations as a key strategic plan has become more commonplace in the sector over recent times. In a challenging market environment, a number of insurers have taken significant steps to improving their respective financial performances, such as Ageas completing the sale of its 100% shareholding in Ageas Protect Limited to AIG in January 2015, and RSA selling its entire shareholding of Intouch Insurance to BLAGOSOSTOYANIE in December 2015. Redundancies have also been made at several UK-based insurers over the last few years, including Aviva and QBE, as some restructure their regional operations and look to cut costs.

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

As highlighted by several cases over the last few years, including TalkTalk in October 2015, companies are starting to see the real threat of cyber attacks against their business, particularly the expense and public scrutiny when confidential data is made available or shared, and the loss of future business. More B2B insurers are therefore starting to offer new products and advice to customers to protect them against such events. For example, Allianz has partnered the cyber rick management company Penture to provide its commercial customers with help and guidance to improve cyber security. 

Forecast
Commercial GWP anticipated to experience stable growth to 2020
The outlook of the commercial insurance industry is looking somewhat brighter than over the last five years due to a more stable economic climate, the introduction of new regulations that will ensure more efficient operations, and the expected rise in interest rates over the next few years which will boost insurers’ net incomes and allow greater flexibility in setting premium rates. Following the previous four years of growth, 2016 will continue this trend, with gross written premiums increasing by 1.2%, or £183 million. This will largely be due to the stable performance of the economy, with business lending and investment levels slowly improving as large businesses become more confident of their prospects over the foreseeable future. This will give them greater financial flexibility to invest in insurance policies to protect their increased asset value.

FIGURE 9: UK Market Forecast for Commercial Insurance, in GWP, 2016-2020
 
(£ Million)
 
Source: MBD forecasts

Industry needs to act to ensure that businesses do not remain under-insured
The current soft market in certain classes of insurance has stemmed from the easy availability of capacity and competition between insurers, which has lowered premiums. Insurers are therefore seeing increased costs through more claims and wider economic issues, while also receiving less income due to lower premiums and poor investment opportunities. This has put immense pressure on profitability, with insurers inevitably scrutinising the payment of claims more closely.

Companies commonly assume that policies will always pay out when needed. While most policies do pay out, any form of complacency or negligence regarding policy agreement can be costly. When a large risk materialises that is uninsured, or where a claim against it is delayed, unpaid, or only partially paid, the consequences can be detrimental to businesses.

Brokers have a vital role to play in ensuring customers have the right level of cover and sums insured, but those dealing with a multitude of covers may find that customers aren’t interested in going into detail, which is essential to avoid under-insurance. Brokers must also consider customers’ over-optimism about their ability to react following a loss and tendency to underestimate the time and cost to recover.

What we think
Insurers must acquire and retain customers while simultaneously improving their customer experience. This is especially difficult to achieve during soft markets as customers are able to negotiate lower insurance prices, sometimes at below cost, as insurers compete for fewer potential buyers. All businesses need to ensure they deal with approved, specialist insurance suppliers to give them the best chance of protecting their operations. However, if businesses want to mitigate the potential impact of the risks that concern them most, they must also be proactive and engage with risk managers on risk identification, evaluation, and control. A focus on these three areas will not only help protect balance sheets, but also ultimately sustain economic growth. Insurers must also deliver good customer service when claims need to be settled. Insurers cannot grow at the expense of client satisfaction, and yet must be able to manage, process, and analyse market data to ensure the utmost accuracy in claim and payment processing to reduce fraud and their own costs.