The UK Motor Insurance Industry - Essay Example

The UK Motor Insurance Industry Motor insurance is the largest sector in the UK general insurance market. In 2005 it was worth £10.4bn (Premiums and claims 2005 p.6). It has the advantage of a vast consumer base, as motor insurance is compulsory for the 40 million licence holders in the UK. With the advent of direct motor insurance, the market has become highly competitive and price-driven. Insurers are now fighting a tough battle to attract and retain customers. Fierce competition has driven down premiums while at the same time the market has had to contend with increased costs (Lorenz 2002 p.12). 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 in the last 2 decades. They have been forced to compete on price and service. The future will bring greater innovation on product offerings as well as the level of service. As smaller companies drop off the radar, the larger insurers will sense the need for innovation and be forced to compete. New services, products and delivery systems will assure that the consumer will be the ultimate beneficiary in this war of direct marketing and innovation. Porters Five Forces Barriers to Entry: The general insurance sector is difficult to enter due to the low availability of profits. It is a capital intense sector that has a high minimum threshold to operate at efficiency. It is also easy to exit. There are no barriers to exit and the industry has seen a recent shakeout through mergers that is expected to continue. Threat of Substitute Products: Minimum levels of motor insurance are compulsory and there is no practical substitute. The delivery system has already been exploited by low overhead direct insurance and there is nothing new on the horizon. Buyers: Buyer position is weak. There are many fragmented consumers who can not exert pressure on the market. In addition, consumers cant switch products and the insurers have implemented distribution alternatives. Suppliers: The supplier position is neutral. Though there is a requirement for some skilled labour, it is more often done through IT or unskilled call centre personnel. Rivalry: The high concentration of market share in a few companies makes for an intense rivalry. Coupled with a low growth rate and a consumer base that is price conscious increases the competition. It is a standardised product that is difficult to differentiate except by price. For the few players, the stakes are high. Summary: Norwich is in a stable position. There is an intense rivalry within the sector, but Norwich has proven its ability to make a profit during difficult times. They are not threatened with a merger or a buyout and smaller companies will not be able to compete. They have also shown an ability to adopt and initiate new technologies to enhance their product. References Abdelhamid, D. M. (2005). International regulatory rivalry in open economics. Aldershot, UK: Ashgate Publishing Company. The Association of British Insurers (2007). Retrieved February 3, 2007, from http://www.abi.org.uk/Display/New_Default.asp?Menu_ID=773&Menu_All=1,773,0 Cheap Car Insurance (2005). Retrieved February 3, 2007, from http://www.admiral.com/ Could pay-as-you-drive insurance work? (2004, August 18). BBC News. Retrieved February 3, 2007, from http://news.bbc.co.uk/2/hi/uk_news/magazine/3574010.stm Lorenz, T. (2002). Direct insurers gear up for war. Precision Martketing Research, 12. Premiums and claims. UK Insurance key facts. (2006). London: Association of British Insurers, 1-15. Retrieved February 3, 2007, from http://www.abi.org.uk/BookShop/ResearchReports/Key%20facts%20v6.pdf Porters Five Forces For Norwich Motor Insurance Read More