The Market

The Current Market

It has always been difficult, and at times near impossible, to make profit from underwriting general insurance in the UK.

Throughout the period of 1993-2004 the Insurance Industry suffered underwriting losses of over £11 billion on total gross premiums of £360 billion - a 3% negative margin. Over the 12 year period, only three years generated an underwriting profit, the largest of that being in 2004 with a profit of £1.36 billion on income of £42 billion which in contrast was a 3% positive margin. The margin spread was from a negative of 8% to a positive of 3%, an 11% swing.

Certain classes of insurance can be rated on a large statistical base and these rates can be set and driven by actuaries and statisticians at the centre.

How does the market work?

Well, the insurance market is cyclical. When the market is hard, there is no real need for deviation from the guide rates, but where the market is soft, judgements are made and often a market rate prevails with holding insurers matching the lowest quote, knowing it to be wrong, and attacking insurers, with no sense of good judgement.

Insurers would usually work to a 30% combined expense and commission rate with 70% of the premium available for claims. Expenses would be split as follows, 5% for the staff directly involved with the quote and administration business and 10% to managerial staff, head office and back office staff, premises, IT, claims, industry levies and marketing etc.

Soft markets produce low premiums, but we are currently experiencing a huge rise in costs, meaning that a serious overhaul has to be done within the industry. The actual risk needs to be assessed and then loaded in terms of costs and commissions, not simply out-pricing the market.

We need to start getting the price right for the particular risks, as the industry is fast spiralling beyond our control! Underwriting is a mathematical task, not an art form, and should be treated as such - and not left to Mystic Meg to conjure up prices.

May 2007