THE BACKGROUND
Motor insurance companies are continuing to struggle with profit margins, as premium prices fail to keep up with the ballooning cost of claims. This decade-old squeeze has intensified, as consumers, spurred on by intensive advertising, use the phone and the internet to compare price differences. The rise of the over-45 demographic is a positive for the sector, though, as older consumers pay more attention to customer service and brand loyalty, and insurers have to pay out less for accidents.
UK drivers are becoming savvier about finding cheaper motor insurance deals, particularly as the internet makes price comparisons easier. The proportion of motorists who bought their insurance online last year rose by 5% to 15%, according to Mintel.
'The internet is shifting the dynamics of the market, as more people become comfortable with buying online. The unbelievable number of quotes available on the web makes prices more competitive,' says Guy Hedger, Direct Line's head of car insurance marketing.
Last week Swiftcover.com launched as the UK's first insurance provider to operate solely online, while Text2Insure claimed to be the first company to allow a policy to be bought via SMS. This rise in competition is bad news for providers, which are struggling with profit margins, but wary of increasing premiums in a fiercely competitive market.
In 2004 net written premiums for all motor insurance business totalled £9.5bn, while outgoing costs reached almost £9.6bn - an underwriting deficit of about £80m, according to Mintel.
Premium rates have failed to keep up with the rise in the cost of claims, fuelled by more drivers switching from third-party to comprehensive cover.
Of the UK's estimated 26m active motor insurance policy holders, a staggering 85% now have comprehensive cover, at an average cost of £750.43 a year. Insurers paid out more than £6bn in claims in 2003, almost double the figure in 1993.
Further bad news comes with Mintel's prediction that the slowing property market and rising levels of debt will stunt the growth of the UK's car population, which reached 30.4m vehicles in 2004.
Rising spend
Adspend in the sector has surged, particularly in the category of direct sales by insurance companies, which provide policies to more than half of all motorists. Last year, motor insurance providers spent £164m on advertising, a 24% increase on 2003.
'In 1999 the sector spent a total of £43.4m on advertising. That has now grown almost four-fold,' says Hedger. 'Eventually, the marketing costs will get too high for many players.' Car insurance is one of the most competitive sectors in financial retail, according to Jonathan Hewitt, director of insurances at Sainsbury's Bank, who estimates that adspend for the category could top £200m for the first time this year. In 2004, TV took the biggest slice of the spend, accounting for £76.8m, followed by direct mail at £65m. The top spender was Norwich Union, which had a £20.4m budget - a 44% hike on 2003.
The majority of ads for car insurance focus on pricing and flag up the com-panies' websites, but some firms are beginning to differentiate themselves through brand-building campaigns.
The AA's latest car insurance ads, for example, feature a team fighting to get the best possible insurance deals for its customers, while Sainsbury's Bank uses an animated till receipt to promote its Esure-provided services.
Churchill has adopted viral marketing methods from the FMCG sector by creating an online 'fun site', which features competitions, ecards and games and is accessed by clicking on its dog brand icon on the home page.
Stablising forces
The sector is seeing growing concentration, which will help to create a less volatile market. Just two companies - Royal Bank of Scotland, whose brands include Direct Line, Churchill and Privilege, and Aviva, which owns Norwich Union - account for half the entire private motor market. Since these two insurers would both lose out by reducing their rates, their high-profile presence will help to keep the market stable.
Retailers such as Sainsbury's and Tesco are bolstering their presence in the sector by partnering with insurers, while non-traditional providers entering the market include Superdrug and Avon.
After losing market share due to the growing presence of direct insurers, brokers must become more efficient to survive. More than a third of all drivers bought insurance from brokers in 2001; now it is down to a quarter.
Looking to the future, demographic trends are favourable for insurers.
The growing number of over-45s is a positive, because this 'greying' market is less likely to switch provider and represents a much lower risk than younger drivers.
At the same time, the number of 20- to 24-year-olds is expected to rise by 7% in the next five years to 4.1m, according to Mintel. This, too, is a boon, as inexperienced drivers pay higher premiums.
The non-standard risk category is also growing. It comprises about 10m people who have had difficulty taking out motor insurance in the past, and is being wooed by direct providers such as Admiral and its associated brands Privilege and First Alternative.
There are further signs that the war is being won against uninsured drivers, who can cost the industry up to £500m a year, adding about £30 a premium - a cost borne by honest motorists. The government's Greenaway Report has recommended the withdrawal of the grace period after a policy's expiration and proposed an automatic fine of up to £100 for motorists who fail to renew their insurance.
PRIVATE MOTOR RISK INSURERS BY GROSS WRITTEN PREMIUMS (GWPs) AND SHARE
Company 2003 GWPs Market
(pounds m) share
(%)
1 Royal Bank of Scotland Group 2673 32.0
2 Aviva 1273 15.2
3 Royal & SunAlliance 495 5.9
4 Zurich Financial Services 446 5.3
5 CIS 415 5.0
6 Fortis 403 4.8
7 AXA 306 3.7
8 Groupama 286 3.4
9 Provident 248 3.0
10 Allianz 225 2.7
11 Liverpool Victoria 224 2.7
12 NFU Mutual 213 2.5
13 HBOS 169 2.0
14 Corinthian 132 1.6
15 MMA 95 1.1
Others 761 9.1
Total 8362 100
Source: ABI/Standard and Poors Thesys/Mintel
MOTOR INSURANCE PROVIDERS BY UK ADSPEND
Company Mar 04 to Mar 03 to %
Feb 05 Feb 04 change
(pounds m) (pounds m)
1 Norwich Union Direct 20.4 14.0 46.0
2 AA Insurance Services 16.8 14.6 16.0
3 Churchill Insurance 14.6 15.9 -8.0
4 Direct Line 12.8 15.0 -14.0
5 Esure 12.3 12.4 -1.0
6 Privilege Insurance 12.0 4.1 195.0
7 Saga Services 10.5 8.5 23.0
8 First Alternative 7.8 n/a n/a
9 Lloyds TSB 7.5 5.2 44.0
10 Liverpool Victoria
Friendly Society 5.9 6.5 -10.0
Others 43.1 36.3 19.0
Total 163.8 132.4 24.0
Source: NMR/Mintel
ANALYST COMMENT - JAMES GREENWELL, FINANCIAL SERVICES ANALYST, DATAMONITOR
Motor insurance in the UK is a buyer's market. Under increasing competitive pressure from a range of market entrants, insurers have continued to cut premiums.
Car insurance premiums fell by 1% on average in the first three months of 2005, according to the AA's insurance premium index, fuelled by an increase in competitive intensity across the market.
Esure has gained a foothold in the market through its aggressive pricing strategy, while retailers such as Sainsbury's and Tesco are also piling the pressure on traditional insurers.
The situation has been compounded by the entrance of Quinn Direct and First Alternative, both of which are targeting the largely untapped non-standard category.
Of late, the main competitive battle has been between Norwich Union and RBS Insurance. Market leader Norwich Union has seen its share eroded to about 15%. The RBS-owned triumvirate of Direct Line, Churchill and UKI, which provide underwriting services for Tesco and Virgin Money, have all been beneficiaries.
As competition grows, so does the importance of branding. This is reflected in the growth of ad budgets at about 20% a year between 2001 and 2004.
Recent campaigns from Sainsbury's, Esure and More Th>n all focus on price.
While premiums will remain a key consumer concern, insurers run the risk of assisting in the commoditisation of the sector.
If this continues to feed through into price competition, it could damage the market's profitability.
There is also a danger in constantly selling on price alone, without mentioning quality of cover or service standards, which could lead to the industry losing sight of the value of the product altogether.
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