MP66152

MAPS : Insurance Prospects: 2002

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This report covers: insurance prospects, motor insurance, buildings and contents, long term, health, insurance, accident, and,

Companies covered include: Abbey National, Barclays, The Co-operative, Group, HSBC, Legal and General, Lloyds TSB, Prudential, Royal Bank of Scotland, Royal & Sun Alliance, Norwich Union, CGNU, Co-operative, Prudential, Legal and General, AXA Sun Life, Cornhill, Aviva, Direct line, The Equitable and Life, Assurance Society, Legal and General, Lloyds of London, Scottish Widows, Standard Life, Zurich Financial Services, BUPA, Niche, Specialists, Britannic, Group, Canada Life, Cornhill Insurance, GE Life, NPI,

EXECUTIVE SUMMARY

Executive Summary

PUBLIC LACKS CONFIDENCE IN INSURERS

Key Note commissioned new research from NOP to discover consumers' perceptions of insurance companies, and found that only small minorities, mainly among the older middle-aged, rate leading insurers as doing a very good job. Norwich Union and Direct Line came top of the poll, but CGNU (renamed Aviva since the survey was carried out) came last. Insurers still have a major task to convince the British public that they are efficient and provide a good service. Customers are nervous: some financial-services companies have broken promises; personal pensions have a poor reputation; employers are abolishing pension schemes based on final salaries and replacing them with uncertain open-market schemes; and householders who live in flood zones can often find buildings and contents insurance only at rates far higher than they have paid before.

Over half of those surveyed by NOP said that they would always shop around for the best deal when buying insurance, even if offered a good loyalty bonus. Young adults are less loyal to existing insurance providers than their elders. Lack of loyalty is also connected to affluence and Internet usage. The survey also indicates that there is a lack of good financial advice available free of charge, and that Internet insurance sales are still minor, but slightly more significant than insurance sales from supermarkets.

Official Investigations Weigh heavy

Insurers have to adapt to lower investment returns, consumers' anxiety over the prospects for both unit-linked and with-profits policies, capped charges on stakeholder products, and a great deal more regulatory attention. The important Sandler Review was published on 8th July 2002. Ron Sandler — formerly the Chief Executive of Lloyd's of London — conducted a review for the Treasury into capital flows and commission structures of investment products, which could have a serious impact on the type of products that insurance companies are allowed to sell in future. The Pickering Report on pensions appeared two days after the Sandler Review, on 10th July, and an Inland Revenue report on pensions taxation is also expected before the end of 2002.

The Financial Services Authority (FSA) is looking into several aspects of the insurance industry, including the reinsurance sector. The FSA has some concerns about the extent of reinsurance, with unregulated companies prepared to offer better terms than in the regulated sector, which has suffered significant underwriting losses since 1997.

Controversial Boardroom Rewards

Boardroom pay levels are controversial when insurers are struggling to make any profits. £1m a year is now the threshold salary, not counting share options and pension fund contributions, for the chief executive of a national insurer. Customers and shareholders have increasing expectations that non-executive directors will function as corporate watchdogs, but the role of non-executive directors is limited by the amount of information they are given. Even auditors often complain that crucial information is withheld. The Higgs Report on the role of non-executive directors is due to be presented to the Government before the end of 2002, and should herald changes in practice.

Revival Potential

The Government has the power to help revive long-term insurance by rescinding the taxation of dividends paid into pension funds, and integrating the basic pension and the State Second Pension (SSP) into one benefit payable to all without means testing. This would mean that pensioners could receive the full benefit of all the savings they have managed to amass. To offset the cost, the minimum age for receipt of the state pension would probably need to be raised in stages to 70.

Prospects for life and medical insurance would be much improved if insurers could routinely use genetic information to help determine premiums, but customers with adverse profiles would risk rejection for cover. (In 2001, companies promised not to use genetic information until 2006.)

Insurance And The Older Population

The population is ageing. The older society has rather less need for insurance than a young society full of car drivers, home buyers, parents responsible for small children and needing to insure for death or loss of income, and adults saving for retirement. The prudent in the elderly society will still insure their homes and contents, their pets and their holiday travel, but once they have purchased one or more annuities, they have less need for long-term insurance.

However, perhaps half of those born between 1961 and 1965 will be living alone by the time they reach 75. Apart from having its own financial demands, solo living has repercussions for care. Solo householders may not have anyone to turn to for looking after them if they are ill or disabled, and thus may wish to insure for the costs of long-term care.

BEARISH FORECASTS

It is hard to believe that any year could be worse than 2001, but in the future, poor underwriting years are likely to outnumber good years, because the weather is becoming less predictable, storms fiercer, floods deeper and forest fires more devastating. People are also becoming more litigious, willing to press companies for compensation if they feel products or services have harmed them.

In bear markets such as the current one, insurers' usual practice of relying on income from investments to compensate for underwriting losses comes unstuck, and the greater the proportion of funds invested in equities, the more unstuck they become. At least 5 years of steady stock market growth is probably needed to revive the insurance sector, and also investors' confidence in insurance companies themselves.

Back To Basics

Insurers are in back-to-basics mode for advertising, focusing on straightforward products that carry a low risk of later litigation. Simple life insurance is proving resilient to the general downturn in financial advertising, as are motor and property insurance.

The automated direct sellers, which have tightly controlled costs and refuse to handle unusual risks, appear the best placed to make headway. Over the coming years to 2007, existing brand strength will be a dominant factor in insurance sales. This is an incentive for large insurers with relatively weak brand visibility in the UK to find partner distributors with stronger brands that carry greater public recognition.

The consumer insurance market itself has poor growth prospects in the short term, for both general and long-term insurance. In general insurance, the motor and property sectors have the best prospects, fuelled by the legal requirement for all vehicles used on public roads to be insured, and by mortgagers' insistence that mortgaged property is insured. These are captive markets. The commercial market will be restricted by the high cost of premiums, especially for all kinds of liability insurance.

TABLE OF CONTENTS

Executive Summary 1

PUBLIC LACKS CONFIDENCE IN INSURERS 1

Official Investigations Weigh heavy 1

Controversial Boardroom Rewards 1

Revival Potential 2

Insurance And The Older Population 2

BEARISH FORECASTS 3

Back To Basics 3

1. Introduction 12

The TOpic 12

Objectives 12

METHODOLOGY 12

Problems In The Research Process 12

DEFINITION 12

2. Strategic Overview 13

MARKET DYNAMICS 13

Table 1: Market Capitalisation of Leading UK Banks and Insurers (£m), 1997-2002 14

Table 2: Leading Insurers and Banks in the UK by Pre-Tax Profits and Directors' Remuneration (£m and %), 2000 and 2001 15

ADVERTISING 17

THE CONSUMER 17

3. Marketing Trends 18

BANCASSURANCE ALLIANCES 18

BACK TO BASICS IN ADVERTISING 18

Overview 18

Table 3: Main Media Advertising Expenditure on Insurance and All Financial Advertising (£000), Years Ending March 2001 and 2002 19

Figure 1: Main Media Advertising Expenditure on Insurance and All Financial Advertising (£000), Years Ending March 2001 and 2002 19

Financial Advertising 20

Table 4: Trends in Main Media Financial Advertising Expenditure (£000), January to March 2000 and 2001 20

Figure 2: Trends in Main Media Financial Advertising Expenditure (£000), January to March 2000 and 2001 20

Insurance 21

Table 5: Main Media Advertising Expenditure on Insurance by Sector (£000), Year Ending March 2002 21

General Insurance 22

Table 6: Main Media Advertising on General Insurance by Sector (£000), Years Ending March 2001 and 2002 23

Figure 3: Main Media Advertising on General Insurance by Sector (£000), Years Ending March 2001 and 2002 23

Long-Term Insurance 24

Table 7: Main Media Advertising Expenditure on Long-Term Insurance by Sector (£000), Years Ending March 2001 and 2002 24

Figure 4: Main Media Advertising Expenditure on Long-Term Insurance by Sector (£000), Years Ending March 2001 and 2002 25

LEADING ADVERTISERS 25

Corporate Ranges of Insurance 25

Buildings and Contents Insurance 26

Motor Insurance 26

Other Insurance 26

ISSUES OF LEGIBILITY 27

THE RISE OF ONLINE PROMOTION 27

FINANCIAL COMPANIES DOMINATE DIRECT MAIL 28

Table 8: Direct Mail Expenditure as a Percentage of Total Advertising Expenditure in the UK (£m and %), 1989-2001 28

Figure 5: Direct Mail Expenditure as a Percentage of Total Advertising Expenditure in the UK (£m), 1989-2001 29

4. Who's Who at the Summit of Insurance 30

THE MILLION-A-YEAR MEN 30

Table 9: Remuneration of Chief Executives and Chairmen of Selected Insurance Companies and Banks in the UK (£ and %), 2000 and 2001 30

NON-EXECUTIVE DIRECTORS 31

Abbey National 32

Aviva 33

Barclays 34

The Co-operative Group 35

HSBC 35

Legal & General 36

Lloyds TSB 37

Prudential 39

Royal Bank of Scotland 40

Royal & Sun Alliance 41

5. Sources of Financial Pressures 42

General Insurance 42

Natural Disasters Damage Property 42

Motor Insurance in a Spin 42

General Liability in the Red 43

LONG-TERM INSURANCE 43

Loss of Faith 43

Poor Reputation for Personal Pensions 44

Fighting Shy of Annuities 44

Not All Gloom 45

6. Successful Sectors: How and Why 46

ACCIDENT AND HEALTH INSURANCE 46

Pecuniary Loss Makes a Modest Profit 46

Annuities for Long-TErm Care 47

Growth from Equity Release 47

7. An International Perspective 50

THE AGEING GLOBAL POPULATION 50

Table 10: Population Aged 65 and Over in Leading OECD Countries (000 and %), 1999 50

Table 11: Ratio of Pensioners to the Working Population by Selected Country (%), 1980, 1990, 2000 and 2030 51

TRANSNATIONAL INFLUENCES 51

JAPAN IS JITTERY 52

CHINA MAY NOT BE THE LAND OF GOLDEN PROMISE 52

BANCASSURANCE BOOM IN GERMANY 53

8. PEST Analysis 54

POLITICAL FACTORS 54

ECONOMIC FACTORS 55

Table 12: UK Economic Indicators (% and £bn), 2002 55

Table 13: The Importance of Financial Companies in the UK's Top 20 by Market Capitalisation (£m), 31st May 2002 56

SOCIAL FACTORS 57

Surge in Over-80s 57

Table 14: Actual and Forecast UK Population by Age Group (% and 000), 1961, 1981, 2001 and 2021 57

Figure 6: Actual and Forecast UK Population by Age Group (% and 000), 1961, 1981, 2001 and 2021 58

Growing Number of Households 58

Table 15: Number of UK Households (million), 1961, 1981 and 2001 58

Table 16: Number of Households in Great Britain and England by Composition (000), 1990-1992, 1996 and 2003 59

TECHNOLOGICAL FACTORS 60

9. Consumer Dynamics 61

INTRODUCTION 61

INSURERS ARE NOT RATED HIGHLY 61

Table 17: Ratings for Selected Leading UK Insurers (% of respondents rating the company `very good overall'), 2002 61

NEED FOR BETTER FINANCIAL ADVICE 62

"I Can Always Find Good Financial Advice Free of Charge" 62

"Insurance Companies Should do More to Explain Their Savings and Investment Plans to Potential Customers" 63

Table 18: Availability of Good Financial Advice Free of Charge and More Explanation Needed From Insurance Companies (% of respondents), 2002 64

SHOPPING AROUND 66

"If I Needed Insurance, I Would Always Shop Around for the Best Deal" 66

"I Would Not Shop Around for Insurance if an Insurer Gave Me a Competitive Loyalty Bonus" 66

Table 19: Attitudes Towards Shopping Around for Insurance (% of respondents), 2002 67

INSURANCE BOUGHT OVER THE TELEPHONE 69

Table 20: Buying Insurance Over the Telephone (% of respondents), 2002 70

RELUCTANCE TO BUY INSURANCE FROM SUPERMARKETS 72

"I Have Bought Insurance From a Supermarket Chain During the Past Year" 72

"I Have Bought Insurance Over the Internet During the Past Year" 72

Table 21: Buying Insurance From a Supermarket or Over the Internet (% of respondents), 2002 73

INSURANCE COMPANY RATINGS 75

Norwich Union 75

CGNU 75

Table 22: `Very Good' Ratings for Norwich Union and CGNU (% of respondents), 2002 76

Direct Line 78

Co-operative Insurance Services 78

Table 23: `Very Good' Ratings for Direct Line and Co-operative Insurance Services (% of respondents), 2002 79

Prudential 81

Legal & General 81

Table 24: `Very Good' Ratings for Prudential and Legal & General (% of respondents), 2002 82

Royal & Sun Alliance 84

AXA Sun Life 84

Cornhill 84

Table 25: `Very Good' Ratings for Royal & Sun Alliance (% of respondents), 2002 85

Table 26: `Very Good' Ratings for AXA Sun Life and Cornhill (% of respondents), 2002 87

10. Company Profiles 89

INTRODUCTION 89

ABBEY NATIONAL GROUP PLC 91

Corporate Strategy 91

Advertising and Distribution 91

Profitability 91

Table 27: Key Figures for Abbey National Group PLC (£m, pence and %), Years Ending 31st December 1997-2001 92

Future Developments 93

AVIVA PLC 93

Corporate Strategy 93

Advertising and Distribution 94

Profitability 94

Table 28: Key Figures for Aviva PLC (£m, pence and %), Years Ending 31st December 1997-2001 95

Table 29: Financial Results and Ratios for Aviva PLC (£m, % and £), Years Ending 31st December 1999-2001 96

Future Company Developments 96

AXA GROUP 96

Corporate Strategy 96

Advertising and Distribution 97

Profitability 97

Table 30: AXA Group's Consolidated Earnings† (em), Years Ending 31st December 2000 and 2001 98

Figure 7: AXA Group's Consolidated Earnings† (em), Years Ending 31st December 2000 and 2001 100

Future Company Developments 101

DIRECT LINE 101

Corporate Strategy 101

Advertising and Distribution 101

Profitability 102

Table 31: Key Figures for Royal Bank of Scotland Group PLC (£m, pence and %), Years Ending 31st December 1997-2001 102

Future Company Developments 103

THE EQUITABLE LIFE ASSURANCE SOCIETY 103

Corporate Strategy 103

Advertising and Distribution 104

Profitability 104

Future Company Developments 105

LEGAL & GENERAL GROUP PLC 105

Corporate Strategy 105

Advertising and Distribution 106

Profitability 106

Table 32: Key Figures for Legal & General Group PLC (£m, pence and %), Years Ending 31st December 1997-2001 106

Table 33: Financial Results and Ratios for Legal & General Group PLC (£m, % and £), Years Ending 31st December 1999-2001 107

Future Company Developments 108

LLOYD'S OF LONDON 108

Corporate Strategy 108

Advertising and Distribution 109

Profitability 109

Future Company Developments 109

PRUDENTIAL PLC 110

Corporate Strategy 110

Advertising and Distribution 110

Profitability 110

Table 34: Key Figures for Prudential PLC (£m, pence and %), Years Ending 31st December 1997-2001 111

Future Company Developments 112

ROYAL & SUN ALLIANCE INSURANCE GROUP PLC 112

Corporate Strategy 112

Advertising and Distribution 112

Profitability 112

Table 35: Key Figures for Royal & Sun Alliance Insurance Group PLC (£m, pence and %), Years Ending 31st December 1997-2001 113

Future Company Developments 113

SCOTTISH WIDOWS PLC 114

Corporate Strategy 114

Advertising and Distribution 114

Profitability 114

Table 36: Financial Results and Ratios for Scottish Widows PLC (£m, % and £), Years Ending 31st December 2000 and 2001 115

Future Company Developments 116

STANDARD LIFE 116

Corporate Strategy 116

Advertising and Distribution 116

Profitability 116

Future Company Developments 116

ZURICH FINANCIAL SERVICES 117

Corporate Strategy 117

Advertising and Distribution 117

Profitability 118

Future Company Developments 118

NICHE SPECIALISTs 118

Healthcare 118

BUPA 118

Corporate Strategy 118

Table 37: Leaders in Private Medical Insurance (estimated % shares), 1992, 1997 and 2001 119

Figure 8: Leaders in Private Medical Insurance (estimated % shares), 1992, 1997 and 2001 119

Advertising and Distribution 120

Profitability 120

Table 38: Financial Performance of BUPA (£m), Years Ending 31st December 1997-2001 121

Future Company Developments 121

Retirement Services 122

Britannic Group PLC 123

Corporate Strategy 123

Advertising and Distribution 123

Profitability 123

Table 39: Financial Results and Ratios for Britannic Group PLC (£m, % and £), Years Ending 31st December 1999-2001 124

Future Company Developments 125

Canada Life Ltd 125

Corporate Strategy 125

Advertising and Distribution 125

Profitability 125

Table 40: Financial Results and Ratios for Canada Life Ltd (£m, % and £), Years Ending 31st December 1999-2001 126

Future Company Developments 127

Cornhill Insurance PLC 127

Corporate Strategy 127

Advertising and Distribution 127

Profitability 127

Table 41: Financial Results and Ratios for Cornhill Insurance PLC (£m, % and £), Years Ending 31st December 1998-2000 128

Future Company Developments 129

GE Life Ltd 129

Corporate Strategy 129

Advertising and Distribution 129

Profitability 129

Table 42: Financial Results and Ratios for GE Life Ltd (£m, % and £), Years Ending 31st December 1999-2001 130

Future Company Developments 130

NPI Ltd 131

Corporate Strategy 131

Advertising and Distribution 131

Profitability 131

Table 43: Financial Results and Ratios for NPI Ltd (£m, % and £), Years Ending 31st December 1999-2001 132

Future Company Developments 133

11. The Future 134

CROSS-SELLING TO EXPAND THE GENERAL MARKET 134

COULD SWITCHABLE ANNUITIES WIN THE PUBLIC BACK? 134

ADVICE GAP YAWNS 134

THE SANDLER REVIEW 135

PICKERING FAVOURS EMPLOYERS OVER EMPLOYEES 136

AUSTERE BUDGETS TO COME 137

LIMITS TO COMMERCIAL RESPONSIBILITY 138

STATISTICS AND MURKY TRUTHS 139

ALL FOR ONE AND ONE FOR ALL 139

UNEASE OVER AUDITORS 140

THE SHAPE OF THE FUTURE 142

12. Glossary 144

13. Further Sources 146

Associations 146

Publications 146

General Sources 147

Bonnier Information Sources 148

Government Sources 149

Other Sources 150

Text © 2002 Key Note

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Last updated by Amanda Porteous 2002