In 2007, it is clear that motor insurance premiums are rising faster than in the last 4 years, as Norwich Union leads the market upwards. By 2006, premiums had been driven down by fierce competition to levels where the costs allowed very little profit margin. Household insurance rates were not so heavily affected, so rates have remained steady. The personal lines insurance sector is still at the low point in the insurance cycle (low premiums and low market concentration).
In the accident and health insurance market, the levels of premiums have risen to reflect the high costs of medical care, as well as the high levels of claims. Most individuals cannot afford full health insurance, but chaos in the NHS drives demand. Premium income has risen, but the number of people covered has fallen. Reinvention of private medical insurance (PMI) awaits a radical rethink of healthcare funding.
Weather disasters (winds, floods and drought) have been rare during the mid-2000s, apart from localised problems, such as the Carlisle and Northampton floods. However, the growing awareness of global warming among the population means that risks are becoming more serious and insurance is generally seen to be inadequate. The localised Kent earthquake in spring 2007, like the Birmingham tornado in 2005, is likely to cost insurers in the region of £15m. In 2007, there is little sign of widespread action either to offer adequate compensation for the consequent effects of disasters, or to avert danger by improving flood defences or ceasing to build on flood plains, for example. Inadequate protection against the effects of terrorist attacks and other human-generated disasters is also a modern hazard that is yet to be addressed. Property insurance premiums are not rising appropriately.
The depolarisation of financial services means that there has been a widespread consolidation of financial advisers and brokers. The insurance companies have bought, and are continuing to buy, broker and adviser networks. Often, independent brokers, owned by an insurer, offer other insurers' products. There has been considerable change in the marketplace in the last 5 years, as Royal & SunAlliance (RSA) left the long-term insurance market, and other insurers began to restructure to cut their costs and combined ratios.
Over the past 5 years, IT has been increasingly employed by the major insurers in order to catch up with banks. Mergers and increasing staff costs mean that flexibility and the ability to transfer functions across borders are necessary. Insurers are increasingly aware that developing new personal lines products that meet the needs of customers before rivals can coax them away, requires high levels of IT adaptability. Products have to be cheap to service, easy to use, quick to approve and fast to implement. At the same time, staff training has to be upgraded, with closer links between insurers and the Chartered Insurance Institute. Training and experience are recognised as being necessities throughout insurers' operations, and they need to be focused on specific applications too. Several insurers have recently restructured their product lines to separate personal lines from commercial lines, or to place responsibility for the provision of insurance to small firms with the insurers' direct insurance operations.
The introduction of regulations that require insurers to calculate their risk levels and introduce adequate capital reserves to cover their likely liabilities means that crises — such as those that arose widely in the early 2000s with the fall of stock-market values — can be better handled in the future. However, in personal lines insurance, with the high liquidity levels experienced in the mid-2000s, there is little difficulty in raising adequate market capital to cover liabilities at a low cost.
Direct operations have become so widespread in personal lines insurance that, for some institutions, they have become lead operations: for example, Direct Line has been instrumental in changing The Royal Bank of Scotland (RBS) into a leading bancassurer. Even AXA has become a direct insurer with its purchase of Swiftcover, a highly successful start-up in 2005 funded with private-equity capital. No significant personal lines insurer now lacks the direct distribution channel.
Future change in the UK market will be driven by regulatory considerations, as the regulator seeks greater fairness and clarity, as well as equity in insurers' dealings with their customers. The opportunity for the UK personal lines retail model to repeat its success in other countries depends on similar regulatory reform in partner countries in the EU. In addition, insurers are looking at Asian and US markets to achieve the returns they are unlikely to see again in the UK.
