| MP66002 |
| MAPS : Commercial Insurance of Small Businesss: September 2002 |
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This report covers: commercial insurance of small business,small business sector, micro business, recent risks, types of insurer, insurance intermediaries, insurance concepts, proprietary companies, mutual indenmity associations, self insureres, captive insurers, re-insurers, insurance, agents, brokers, state supervision, solvency margins, physical hazard, moral hazard, fraud, carelessness, unreasonableness, main insurers, motor vehicles, property, legal expenses, pecuniary losss, company pensions, key person insurance, stakeholder pensions,
Companies covered include: Pioneer Products, RewardsPlus, Access Coverage, Nekema Incorporated, Allianz Cornhill, Aviva, Axa, Groupama, Royal & Sun Alliance, Zurich, national brokers, provincial brokers, e-insurance, broker e-insurance, employee benefits,
EXECUTIVE SUMMARY
| Executive Summary |
| This Market Assessment report analyses the commercial insurance market for small businesses. Using information currently available, it looks at how insurers are coping with what is an unprofitable and particularly risky element of general insurance. |
| The report includes an overview of the number and size of small businesses in the UK, and their distribution across the sectors of the UK economy. It highlights the economy's effective division into two: one for the declining manufacturing sector and one for the burgeoning service sector. Growth is being stimulated by government investment in the public sector, while it tries to promote small businesses in socially excluded areas. |
| The complexities of commercial insurance and the many aspects of business life that it can cover are outlined. The variety of risks that must be considered by small businesses — particularly in an age when litigation is a fast-growing activity — is expanding, and the burdens of increased regulation bear heavy on the shoulders of such businesses. |
| The trends in insurance for liability and employers' liability are explored, along with the major factors that have contributed to the rise in premiums in 2001/2002. Also covered are the growth in pecuniary loss and property damage insurance. Other sectors include engineering (including computer cover), motor vehicles, legal expenses and credit insurance. |
| The profitability of these areas of insurance has been poor for many years, while competition between insurers has driven down premiums to a level where insurers have had to rely on their investment returns to cover their losses. |
| Distribution trends show that independent intermediaries continue to dominate sales of insurance, although the dynamics within this sector are changing. E-insurance is dealt with separately, as this cuts across all channels of distribution and its impact on different aspects of insurance are varied. |
| In global terms, the UK is a major market in insurance, lying behind only the US and Japan, in terms of premium income. Within the EU, directives are affecting the operation of insurance, in particular, cross-border trading and price controls. The recent launch of the euro is also having an impact cross-frontier trading in this market. |
| Key Note believes that the 'soft' market conditions have come to an end, and forecasts a rapid hardening of the market as premiums rise to restore insurers' reserves. This `hard' market is expected to continue for the foreseeable future, with small businesses being forced to seek new ways of driving down business risk, if they are to be insured at a reasonable cost. |
TABLE OF CONTENTS
| Executive Summary 1 |
| 1. Introduction 11 |
| DEFINITION 11 |
| Table 1: DTI Definition of Firms by Size (number of employees) 12 |
| Table 2: Companies Act Definition of Small and Medium-Sized Enterprises by Maximum Turnover, Balance Sheet and Number of Employees (£m and number) 12 |
| Table 3: European Commission Definition of Small and Medium-Sized Enterprises by Maximum Turnover, Balance Sheet, Number of Employees and Percentage Owned (*m, number and percentage), 2001 13 |
| 2. Strategic Overview 14 |
| THE SMALL BUSINESS SECTOR 14 |
| Number of Businesses 14 |
| Table 4: Number of Small and Medium-Sized Enterprises in the UK (million), 1980-2001 15 |
| Figure 1: Number of Small and Medium-Sized Enterprises in the UK (million), 1980-2001 16 |
| Micro Businesses 16 |
| Trends in Small Business Numbers 17 |
| Table 5: Trends in Small Business Start-Ups and Closures in the UK (number of businesses), 1997-2001 17 |
| SMALL BUSINESS SECTOR DYNAMICS 17 |
| Breakdown by Industry Sector 17 |
| Table 6: Breakdown of Small Firms in the UK by Industry Sector (% of companies with under 50 employees), 1997-2001 18 |
| The Service Sector 19 |
| REGIONAL DISTRIBUTION OF ENTERPRISES 19 |
| Table 7: UK Regional Breakdown of Enterprises (%), 1999 19 |
| MARKET POSITION OF THE SMALL BUSINESS SECTOR 20 |
| Table 8: Composition of Small, Medium and Large Businesses in the UK by Number of Employees by Sector (%), 2001 21 |
| GDP Growth by Industry Sector 22 |
| Table 9: Trends in UK Gross Domestic Product by Industry Sector (index 1995=100), 1997-2001 22 |
| Figure 2: Trends in UK Gross Domestic Product by Industry Sector (index 1995=100), 1997-2001 23 |
| ECONOMIC TRENDS 23 |
| Business Optimism 23 |
| Table 10: Business Optimism Ratios in the UK Manufacturing Sector (%), April 1997 to April 2002 24 |
| Investment 24 |
| Table 11: Ratios of Investment in Buildings in the UK Manufacturing Sector (%), April 1997-2002 25 |
| Table 12: Ratios of Investment in Plant and Machinery in the UK Manufacturing Sector (%), April 1997-2002 25 |
| Figure 3: Ratios of Investment in Plant and Machinery in the UK Manufacturing Sector (%), April 1997 -2002 26 |
| Prices, Interest Rates and Savings 26 |
| Table 13: UK Consumer Expenditure Index and Retail Price Index (1995=100), 1997-2002 27 |
| Table 14: Interest Rates, Savings Ratios, Equity Prices and House Prices (% and index 1995=100), 1997-2002 28 |
| ECONOMIC FORECASTS 28 |
| RECENT RISKS 29 |
| Table 15: Major Incidents Affecting the UK Commercial Insurance Market, 1998-2002 29 |
| 3. Commercial Insurance 30 |
| TYPES OF INSURER 30 |
| Lloyd's Underwriters 30 |
| Mutual Companies 30 |
| Proprietary Companies 30 |
| Mutual-Indemnity Associations 31 |
| Self Insurers 31 |
| Captive Insurers 32 |
| Reinsurers 32 |
| INSURANCE INTERMEDIARIES 33 |
| Insurance Agents 33 |
| Insurance Brokers 33 |
| REGULATION 34 |
| State Supervision 34 |
| General Insurance Standards Council 34 |
| Solvency Margins 35 |
| Conduct of Business 36 |
| 4. Insurance Concepts 37 |
| INTRODUCTION 37 |
| INSURANCE CONTRACT 37 |
| INSURABLE INTEREST 37 |
| UTMOST GOOD FAITH 38 |
| INDEMNITY 39 |
| SUBROGATION 40 |
| CONTRIBUTION 41 |
| UNDERWRITING 41 |
| PHYSICAL AND MORAL HAZARD 42 |
| Physical Hazard 42 |
| Moral Hazard 42 |
| Fraud 43 |
| Carelessness 43 |
| Unreasonableness 43 |
| PREMIUMS 43 |
| Reserves 44 |
| Adjustable Premiums 44 |
| Flat Premiums 44 |
| Reasons for Rising Premiums 45 |
| RENEWALS 46 |
| CLAIMS AND DISPUTES 47 |
| 5. Types of Insurance 48 |
| THE CURRENT CLIMATE OF COMMERCIAL INSURANCE 48 |
| INSURANCE AND THE SMALL BUSINESS 48 |
| COMMERCIAL BUSINESS BY CLASS 49 |
| Table 16: Gross Written Premiums in the UK by Class of Business (£m), 2000 50 |
| ENGINEERING 51 |
| Table 17: Construction and Engineering Contractors' All-Risks Insurance in the UK by Value of Premiums and Claims, and Volume of Claims (£000 and number), 1997-2001 52 |
| Table 18: Engineering All-Risks Insurance in the UK by Value of Premiums and Claims, and Volume of Claims (£000 and number), 1997-2001 53 |
| Computers 53 |
| Table 19: Computer Insurance in the UK by Value of Premiums and Claims, and Volume of Claims (£000 and number), 1997-2001 54 |
| The Main Insurers 54 |
| MOTOR VEHICLES 55 |
| Table 20: Commercial Motor Insurance in the UK by Value of Premiums and Claims (£m), 1997-2001 55 |
| Table 21: The UK Commercial Motor Insurance Revenue Account (£m), 1997-2001 56 |
| Table 22: UK Commercial Motor Insurance Operating Ratios (%), 1997-2001 57 |
| Road Traffic Acts 1930-1981 58 |
| PROPERTY 58 |
| Table 23: Commercial Property Insurance in the UK by Value of Premiums and Claims (£m), 1997-2001 59 |
| Figure 4: Commercial Property Insurance in the UK by Value of Premiums and Claims (£m), 1997-2001 60 |
| Table 24: UK Commercial Property Insurance Revenue Account (£m), 1997-2001 61 |
| Table 25: UK Commercial Property Insurance Operating Ratios (%), 1997-2001 62 |
| Figure 5: UK Commercial Property Insurance Operating Ratios (%), 1997-2001 62 |
| Major Perils 63 |
| Table 26: UK Commercial Property Claims for Major Perils by Value (£m), 1997-2001 63 |
| Figure 6: UK Commercial Property Claims for Major Perils by Value (£m), 1997-2001 64 |
| Fire 64 |
| Theft 65 |
| Other Risks 65 |
| All Risks 65 |
| Glass 65 |
| The Main Insurers 65 |
| Table 27: Estimated Market Shares of the Top Five Property Insurers by Gross Written Premiums (%), 2001 66 |
| LIABILITY 66 |
| Table 28: General Liability Insurance in the UK by Value of Premiums and Claims (£m), 1997-2001 66 |
| Table 29: The UK General Liability Insurance Revenue Account (£m), 1997-2001 68 |
| The Liability Crisis 68 |
| Employers' Liability 69 |
| Table 30: Employers' Liability Insurance in the UK by Value of Premiums and Claims (£m), 1999-2001 69 |
| Table 31: The UK Employers' Liability Insurance Revenue Account (£m), 1999-2001 70 |
| The Main Insurers 70 |
| Industries at Risk 70 |
| Public Liability 71 |
| Product Liability 72 |
| Professional Indemnity 72 |
| Directors' and Officers' Liability 73 |
| LEGAL EXPENSES 73 |
| Table 32: Legal Expenses Insurance in the UK by Value of Premiums and Claims, and Volume of Claims (£000 and number), 1997-2001 73 |
| Table 33: Commercial Non-Motor Legal Expenses Insurance in the UK by Value of Premiums and Claims, and Volume of Claims (£000 and number), 1997-2001 74 |
| PECUNIARY LOSS 74 |
| Table 34: Pecuniary Loss Insurance in the UK by Value of Premiums and Claims (£m), 1997-2001 75 |
| Figure 7: Pecuniary Loss Insurance in the UK by Value of Premiums and Claims (£m), 1997-2001 76 |
| Table 35: The UK Pecuniary Loss Insurance Revenue Account (£m), 1997-2001 77 |
| Table 36: UK Pecuniary Loss Insurance Operating Ratios (%), 1997-2001 78 |
| Figure 8: UK Pecuniary Loss Insurance Operating Ratios (%), 1997-2001 78 |
| CREDIT INSURANCE 79 |
| Table 37: Credit Insurance in the UK by Value of Premiums and Insured Turnover, and Volume of Policies (£000, £m and number), 1997-2001 79 |
| company pensions 80 |
| Group Life Insurance 80 |
| Key Person Insurance 80 |
| Company Pension Schemes 80 |
| Stakeholder Pensions 81 |
| MONEY POLICIES 81 |
| GOODS-IN-TRANSIT INSURANCE 81 |
| BUSINESS INTERRUPTION INSURANCE 81 |
| ACCIDENT INSURANCE 82 |
| FIDELITY GUARANTEE INSURANCE 82 |
| MARINE AND AVIATION INSURANCE 82 |
| 6. Profitability 83 |
| FACTORS AFFECTING PROFITABILITY 83 |
| COMMISSION RATIOS 83 |
| EXPENSE RATIOS 84 |
| TOP TEN INSURERS 84 |
| Table 38: Top Ten Commercial Insurers in the UK by Value of Gross Written Premiums (%), 2001 84 |
| Figure 9: Top Ten Commercial Insurers in the UK by Value of Gross Written Premiums (%), 2001 85 |
| 7. Distribution 86 |
| OVERVIEW 86 |
| Table 39: UK General Insurance Sources of Commercial-Lines Business by Gross Written Premiums (%), 1997-2001 86 |
| BROKERS 87 |
| Table 40: The UK's Ten Largest Insurance Brokers, 2002 88 |
| National Brokers 88 |
| Provincial Brokers 89 |
| LLOYD'S OF LONDON 89 |
| The London Market 90 |
| Size of the London Market 90 |
| Table 41: Losses at Lloyd's by Value (£bn), 1999-2001 91 |
| SPECIALIST BROKERS 91 |
| COMMISSION 92 |
| 8. E-Insurance 93 |
| INTRODUCTION 93 |
| EFFICIENCY 93 |
| BUSINESS TO BUSINESS 94 |
| GROWTH OF E-INSURANCE 94 |
| POLARIS 95 |
| BROKER E-INSURANCE 95 |
| DISTRIBUTION 96 |
| Customers 96 |
| Employee Benefits 96 |
| Pioneer Products 96 |
| RewardsPlus 96 |
| Access Coverage Corporation 97 |
| Nekema Incorporated 98 |
| INTERMEDIARIES 98 |
| TRENDS IN DISTRIBUTION 99 |
| BENEFITS AND DISADVANTAGES OF E-INSURANCE 100 |
| 10. PEST Analysis 102 |
| POLITICAL FACTORS 102 |
| ECONOMIC FACTORS 103 |
| SOCIAL FACTORS 103 |
| TECHNOLOGICAL FACTORS 104 |
| 9. An International Perspective 105 |
| THE WORLD'S LARGEST INSURANCE MARKETS 105 |
| Table 42: The World's Ten Largest Insurance Markets by Premium Income (£m and %), 1999 105 |
| PROFITABILITY AND THE INSURANCE CYCLE 106 |
| Table 43: Profitability Decomposition of Major Non-Life Markets by 5-Year Averages of Net Premiums (%), 1995-2000 106 |
| NON-LIFE INSURANCE MARKETS COMPARED 108 |
| Table 44: Comparison of the World's Biggest Insurance Markets by Value and Volume ($bn, million, number and %), 1998 108 |
| DEREGULATION 109 |
| 11. Company Profiles 110 |
| ALLIANZ CORNHILL 110 |
| Corporate Strategy 110 |
| Strengths and Weaknesses 110 |
| Brand Development 111 |
| Innovations 111 |
| Appointments 112 |
| Distribution 112 |
| Profitability 112 |
| Profit Margin 112 |
| AVIVA 112 |
| Corporate Strategy 112 |
| Strengths and Weaknesses 113 |
| New Product Development 113 |
| Brand Development 114 |
| Innovations 114 |
| Appointments 114 |
| Distribution 115 |
| Profitability 115 |
| Future Company Developments 115 |
| AXA 115 |
| Corporate Strategy 115 |
| Strengths and Weaknesses 116 |
| New Product Development 116 |
| Brand Development 116 |
| Innovations 116 |
| Appointments 117 |
| Distribution 117 |
| Profitability 117 |
| Future Company Developments 117 |
| GROUPAMA 118 |
| Corporate Strategy 118 |
| Strengths and Weaknesses 118 |
| New Product Development 119 |
| Brand Development 119 |
| Innovations 119 |
| Appointments 119 |
| Distribution 119 |
| Profitability 120 |
| Royal & Sunalliance 120 |
| Corporate Strategy 120 |
| Strengths and Weaknesses 120 |
| New Product Development 121 |
| Brand Development 121 |
| Innovations 121 |
| Appointments 122 |
| Advertising 122 |
| Distribution 122 |
| Profitability 122 |
| Profit Margin 122 |
| ZURICH 123 |
| Corporate Strategy 123 |
| Strengths and Weaknesses 123 |
| New Product Development 124 |
| Brand Development 125 |
| Innovations 125 |
| Appointments 126 |
| Advertising 126 |
| Distribution 126 |
| Profitability 126 |
| Large Movements in Profitability/Market Share 126 |
| Future Company Developments 127 |
| 12. The Future 128 |
| FORECASTS 2002 to 2007 128 |
| Engineering 128 |
| Table 45: Forecast Construction and Engineering Contractors' All-Risks Insurance in the UK by Value of Premiums and Claims, and Volume of Claims (£000 and number), 2002-2007 128 |
| Table 46: Forecast Engineering All-Risks Insurance in the UK by Value of Premiums and Claims, and Volume of Claims (£000 and number), 2002-2007 129 |
| Computers 129 |
| Table 47: Forecast Computer Insurance in the UK by Value of Premiums and Claims, and Volume of Claims (£000 and number), 2002-2007 129 |
| Motor Vehicles 130 |
| Table 48: Forecast UK Commercial Motor Insurance Revenue Account (£m), 2002-2007 130 |
| Property 130 |
| Table 49: Forecast UK Commercial Property Insurance Revenue Account (£m), 2002-2007 131 |
| Liability 131 |
| Employers' Liability 131 |
| Table 50: Forecast UK Employers' Liability Insurance Revenue Account (£m), 2002-2007 132 |
| Legal Expenses 132 |
| Table 51: Forecast Commercial Non-Motor Legal Expenses Insurance in the UK by Value of Premiums and Claims, and Volume of Claims (£000 and number), 2002-2007 133 |
| Pecuniary Loss 133 |
| Table 52: Forecast UK Pecuniary Loss Insurance Revenue Account (£m), 2002-2007 133 |
| Table 53: Forecast UK Pecuniary Loss Insurance Operating Ratios (%), 2002-2007 134 |
| Credit Insurance 134 |
| Table 54: Forecast Credit Insurance in the UK by Value of Premiums and Insured Turnover and Volume of Policies (£000, £m and number), 2002-2007 134 |
| CONSUMER ISSUES 135 |
| Table 55: Forecast Average Earnings, Unemployment, Retail Price Index and Interest Rates (% and index 1995=100), 2002-2007 135 |
| DISTRIBUTION 136 |
| Table 56: Forecast UK General Insurance Sources of Commercial-Lines Business by Gross Written Premiums (%), 2002-2007 137 |
| SURVIVING THE EMPLOYERS' LIABILITY CRISIS 138 |
| MARKET DYNAMICS 138 |
| Political Factors 138 |
| Economic Factors 139 |
| Social Factors 140 |
| Technological Factors 140 |
| 13. Further Sources 142 |
| Associations 142 |
| Publications 143 |
| General Sources 143 |
| Bonnier Information Sources 144 |
| Government Publications 145 |
| Other Sources 146 |
Text © 2002 Key Note
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Last updated by Amanda Porteous November 2002
