The UK Motor Insurance Industry - Essay Example

The last few years have seen the major insurers cut costs and attempt to consolidate their market share with a wave of mergers and take-overs. The current state of the industry is marked by competition. The future will be driven by innovation, and will benefit the UK consumer. The private motor underwriting result deteriorated in 2005, as the market returned a loss of 232 million. The private motor underwriting loss has been increasing since 2001 when it approached the break-even mark with a loss of only 86 and the market has not made a profit since 1994.

This has resulted in the consolidation of the industry as smaller insurers find it more difficult to compete. In both private and commercial motor insurers, the top 20 companies are responsible for over 95% of the business (The Association of British Insurers 2007). This trend is likely to continue as smaller companies continue to stand losses and are forced to merge, consolidate, or innovate. The Internet has offered brokers a new low cost outlet to offer competitive rates to consumers. According to Lee Mooney, Admiral motor product group manager says, "The Internet is growing in importance as a medium because of the savings it can offer big insurers"(Lorenz 2002 p.12). The obvious success of direct insurance companies prompted traditional insurance players to set up their own distinct direct insurance brands.

It is forecast that by the end of 2007, 20% of the motor insurance will be sold over the Internet (The Association of British Insurers 2007). "The development of websites and of broadband Internet access is likely to lead to more integrated insurance purchasing, as consumers research the Web and then choose a direct supplier either online or through a retail outlet" (The Association of British Insurers 2007).One of the driving forces behind the need to lower costs through direct marketing has been the increased cost of servicing claims.

The nature on motor insurance is such that the client is paying a fee now for a service to be rendered in the future (Abdelhamid 2005 p.214). Fluctuations in claims due to inflation and rising repair rates may exceed the premium value. This has forced insurers to become dependent on the value of the return on the invested premiums. When investment value drops, this places the insurer in jeopardy of taking a loss on the claim. This has had the effect of promoting lower cost Internet and call centre based sales activities.

As direct marketing companies proliferate they also look to differentiate their products. In 2005, Admiral launched MultiCar. Drivers who have 2 or more cars in their household could get a discount of up to 23% on their motor car insurance (Cheap Car Insurance). Norwich, a division of Aviva since its merger with CGU in 2000, offers the pay as you drive program. They offer a black box telemetry system that bills you for the miles you drive (Could pay-as-you-drive insurance work 2004). Innovations in service and pricing will continue to drive the industry.

Norwich Union, the largest automobile insurer in the Great Britain, has set up its own medical clinic to treat victims of car accidents involving its policyholders. They have their own clinics, doctors and therapists that treat people making claims. It quickens recovery, cuts costs, and limits the potential of future litigation. This is one more innovation that is driving the motor insurance industry. Motor insurance has gone through a revolution