FINANCIAL MARKETS SERIES INSURANCE DECEMBER sponsored by: Liiba. London & International Insurance Brokers' Association

Transcription

1 FINANCIAL MARKETS SERIES INSURANCE DECEMBER sponsored by: Liiba London & International Insurance Brokers' Association

2 ASSOCIATION OF BRITISH INSURERS (ABI) The ABI has been the voice of insurance since 98, representing the general insurance, protection, investment and long-term savings industry. It has over members, accounting for some 9% of premiums in the. The ABI s role is to: Be the voice of the insurance industry, leading debate and speaking up for insurers. Represent the insurance industry to government, regulators and policy makers in the, EU and internationally, driving effective public policy and regulation. Advocate high standards of customer service within the industry and provide useful information to the public about insurance. Promote the benefits of insurance to the government, regulators, policy makers and the public. INTERNATIONAL UNDERWRITING ASSOCIATION OF LONDON (IUA) The IUA is the world's largest representative organisation for international and wholesale insurance and reinsurance companies. It exists to promote and enhance the business environment for international insurance and reinsurance companies operating in or through London. The IUA s key priorities are to: Improve the efficiency of doing business in London by promoting the implementation of process reforms and electronic interfaces across the market. Advance the development of market expertise and innovation by supporting numerous underwriting and claims committees which provide valuable technical input to the benefit of the whole membership. Influence public policy and compliance developments by monitoring and responding as necessary to insurance and reinsurance regulatory developments. Foster relationships with the broking community and other client-related stakeholders, including enhancing dialogue with the risk management community. The IUA was formed on December 998, through the merger of the London International Insurance and Reinsurance Market Association (LIRMA) and the Institute of London Underwriters (ILU). Liiba London & International Insurance Brokers' Association LONDON & INTERNATIONAL INSURANCE BROKERS ASSOCIATION (LIIBA) LIIBA is the trade association representing the interests of insurance and reinsurance brokers operating in the London and international markets. LIIBA members place in excess of 7bn of premiums through the London Market and many billions more across the world. Collectively they generate one third (.7bn) of the insurance sector s net exports for the economy. LIIBA s mission is to ensure that London remains where the world wants to do business by continuing the transformation of market processes and maintaining the highest professional standards. LIIBA s key priorities are: Representing members interests to government, the FSA, the EU and international bodies to establish a proportionate regulatory framework. To modernise the London Market s business processes to be competitive and efficient, delivering an improved client service. Supporting members with regard to legislative and technical changes. Strengthening relationships with Lloyd s, the LMA and IUA on a wide range of market issues. LLOYD S For more than three centuries, Lloyd s has been at the forefront of managing risk. Today, Lloyd s accepts business from over countries and territories, providing innovative insurance solutions to 9% of FTSE and 97% of Dow Jones Industrial Average companies. At Lloyd s you get access to world class specialist talent, knowledge and expertise. From insuring works of art to wind farms, our brokers and underwriters craft innovative insurance solutions for the world s most unusual risks. And should the unexpected ever happen, Lloyd s policyholders can rest assured that they ll get fast and fair decisions, and that their policy is backed by Lloyd s financial strength. Lloyd s where the world takes risks.

3 INSURANCE DECEMBER Insurance products protect individuals and business from a wide range of risk. The insurance industry is the largest in Europe and third largest in the world after the and Japan. It consists of insurance companies, the Lloyd s market, intermediaries and various specialist support professions and services. The London Market is the world s leading market for internationally traded insurance and reinsurance. SUMMARY International comparisons Global insurance premiums grew by.7% in inflation-adjusted terms in to $. trillion, climbing above pre-crisis levels (Chart ). The return to growth and record premiums generated during the year followed two years of decline in real terms (Chart ). Life insurance premiums increased by.% in and non-life premiums by.%. While industrialised countries saw an increase in premiums of around.%, insurance markets in emerging economies saw rapid expansion with % growth in premium income. The global insurance industry was sufficiently capitalised to withstand the financial crisis of 8 and 9 and most insurance companies restored their capital to pre-crisis levels by the end of. With the continuation of the gradual recovery of the global economy, it is likely the insurance industry will continue to see growth in premium income both in industrialised countries and emerging markets in. The insurance market The was the third largest insurance market in the world in generating around 7% of global premium income. Its premiums per head were the fifth highest in the world and premiums as a proportion of GDP were third highest. Contribution to the economy Insurance companies and pension funds make an important contribution to the economy. They accounted for.% of GDP in or some.bn and provided employment for around, people, including, in the London Market. Insurance net exports totalled.bn in. Insurance brokers generated one-third of the sector s net exports and.7% of GDP. Funds under management by insurance companies totalled over.7 trillion in, generating nearly a half of institutional investment holdings in the. The insurance industry is also a major contributor to the s tax take. In the / tax year Association of British Insurers (ABI) members contributed some.bn in taxes, equivalent to.9% of total Government tax receipts.,,,,,, Global insurance premiums up.7% in to a record $. trillion Chart Global premium income by type $bn, Life insurance, General insurance % 9% 8% % Life insurance approximates to long-term insurance (in section of report). Non-life approximates to general insurance. Source: Swiss Re Chart Global premium income growth Inflation adjusted growth rates (%) Total Life insurance Non-life insurance Source: Swiss Re

4 INSURANCE DECEMBER Net worldwide premium income of the insurance market fell by % in to 98.7bn. Premium income remains down by around a quarter on the peak in 7, largely due to a decline in long-term premiums. The insurance industry paid out over bn in claims and other outgoings during. It should be noted that the above figures only include data supplied to the Association of British Insurers (ABI) and do not include estimates for non-suppliers or Lloyd s. Long-term premium income fell by % in to.bn. Demand for long-term cover remained subdued as a result of the economic slowdown placing downward pressure on premium rates. Occupational pensions premiums saw the biggest decline, followed by life insurance. New longterm premium income in the first three quarters of totalled 7.bn, a drop of.% on the same period in the previous year. General insurance premiums on the other hand remained strong, increasing by % in to.bn. The key areas of growth in recent years for general insurance have been the motor and property markets. The London Market Gross premiums on the London Market were conservatively estimated at.9bn in, up % on the previous year. Lloyd s generated % of identified London Market premiums, the company market % and P & I Clubs accounted the remaining %. London is a key centre for international insurance and reinsurance, particularly for marine and aviation business and reinsurance. It is the only place in the world where all of the world s largest insurers and reinsurers have offices. INTERNATIONAL COMPARISONS Largest insurance markets Global insurance premiums grew by.7% in inflation-adjusted terms in to $. trillion, climbing above pre-crisis levels (Chart, Table ). The return to growth and record premiums generated during the year followed two years of decline in real terms. Life insurance premiums increased by.% and non-life premiums by.% (Chart ). While industrialised countries saw an increase in premiums of around.%, insurance markets in emerging economies saw rapid expansion with % growth in premium income during the year. This was largely a result of the quicker pace of economic growth in emerging market countries and rising commodity prices. The global insurance industry was sufficiently capitalised to withstand the financial crisis of 8 and 9 and most insurance companies restored their capital to pre-crisis levels by the end of. With the continuation of the gradual recovery of the global economy, it is likely the insurance industry will continue to see growth in premium income both in industrialised countries and emerging markets in. The insurance industry is exposed to the economic downturn on the assets side by a decline in returns on investments and on the liabilities side by a rise in claims. So far the extent of losses on both sides has been limited and the insurance sector was sufficiently capitalised to withstand the financial crisis. The vast majority of insurance companies had enough capital to absorb losses with the exception of a small number of and European companies which required financial aid from government at the outset of Table Largest insurance markets Japan France Germany PR China Italy Canada South Korea Netherlands Other World Source: SwissRe Premium income $bn, ,7,9 % share 7 7 Chart Global premium volume by region $bn,,, Premium income $bn, , North America Asia 9 % share Europe Source: Swiss Re Chart Premium income by type and country $bn, Japan France Germany PR China Italy Canada South Korea Netherlands Source: Swiss Re Non-life Life 7 8

5 INSURANCE DECEMBER the crisis. In most cases the companies that turned to government for support were those where the core insurance business was combined with banking operations or financial guarantee business. Unlike many other institutional players in the financial markets, insurers are not faced to the same extent with the risk of funds being withdrawn. They also employ less leverage than banks and have longer-term liabilities and investments. Advanced economies account for the bulk of global insurance. With premium income of $,bn, Europe was the most important region in (Chart ), followed by North America $,9bn and Asia $,bn. Europe has however seen a decline in premium income during the year in contrast to the growth seen in North America and Asia. The top four countries generated more than a half of premiums (Table ). The and Japan alone accounted for % of world insurance, much higher than their 7% share of the global population. Emerging economies accounted for over 8% of the world s population but only around % of premiums. Their markets are however growing at a quicker pace (Charts and ). The insurance market was the largest in Europe and after the and Japan was the third largest in the world in. The volume of insurance business totalled $bn in or 7.% of global premiums. Over the past decade the share declined slightly to 7% of the global market, Japan s share nearly halved to % while the s share remained relatively stable at around 7%. The s life market premiums were the largest in Europe, almost double those of any other European country apart from France. The was also the second largest European non-life insurer, after Germany. Several factors can influence the premium levels in a country. Countries such as India and China are seen as having great potential due to their large population, but low income for the majority provides little headroom for spending on insurance. Like other financial services, insurance business is becoming more international in its organisation and operation. The changes are coming from both the demand and the supply sides of the industry and are also being made possible by developments in information technology. Premium income by type Chart Life business by region inflation adjusted % growth Industrialised countries North America Western Europe Continental Europe Japan/new ind. Asian ec. Oceania Emerging markets South and East Asia Latin Am. and the Carib. Central and Eastern Eur. Africa Middle East/Central Asia - Source: Swiss Re Growth rate Growth rate -9 World Chart Non-life business by region inflation adjusted % growth Industrialised countries North America Western Europe Continental Europe Japan/new ind. Asian ec. Oceania Emerging markets South and East Asia Latin Am. and the Carib. Central and Eastern Eur. Africa Middle East/Central Asia - Source: Swiss Re Growth rate Growth rate -9 World Although the insurance market is often viewed as a single entity there are substantial differences in its two segments - life insurance on the one hand, and general or non-life insurance on the other. Apart from the, Germany and Canada where the proportion of non-life business was larger than life business, in most developed economies life business accounted for the bulk of premiums. This was especially the case in Japan, the and France (Chart ). Life insurance accounted for the majority of world insurance in with premium income totalling $,bn or 8% of the total (Chart ), up.% on the previous year in inflation adjusted terms. This follows a % decline in the previous year. Emerging economies contributed most to the growth (Chart ). The capital position of insurance companies has improved markedly during, reaching the pre-crisis level by the end of the year. New business recovered robustly in many countries. The major exceptions were the and Australia. In markets like the and Ireland, sales remained subdued due to a weak housing market. Single premium Table Insurance density Switzerland Netherlands Luxembourg Denmark Japan Ireland France Finland Sweden Global Source: Swiss Re Total business $,,8,,8,97,9,97,87,8,8 7 of which % share Non Life Life

6 INSURANCE DECEMBER products have particularly been effected since the start of the economic downturn. Markets with a high share of regular premiums such as Germany have therefore been less affected. In emerging economies life premiums rose % during following % growth in the previous year. Developed countries are set to experience a dramatic demographic shift during the course of the next years due to increasing life expectancy and a falling birth rate. Trends towards greater individual provision for retirement and health care and less reliance on state pension systems should provide the life insurance industry with significant growth opportunities in the future. General insurance premiums returned to growth in following two years of decline in real terms. Premiums increased by.% during the year to $,89bn. South and East Asia in particular saw strong growth while business in industrialised countries remained subdued (Chart ). Despite higher than average earthquake losses, overall catastrophe claims in were in line with the long-term average. Table Insurance penetration Premiums as share of GDP, Total business Taiwan South Africa Netherlands Hong Kong South Korea France Japan Switzerland Bahamas Global Source: Swiss Re of which % share Non Life Life Insurance density and penetration The measurement of premiums per head gives a useful comparison of insurance density in various countries although price variations slightly distort some figures. According to this measure, the had the fifth highest insurance density in the world in (Table ). Life insurance premiums per head have generally grown faster than non-life premiums for most countries. Insurance density is significantly higher in industrialised countries than in emerging economies although there are huge variations in penetration between various emerging economies. It should be noted however, that direct country co mparisons may be misleading as the level of expenditure on insurance depends on the relative importance of state and private welfare insurance which varies from one country to another. Another way of comparing insurance industries in various countries is to look at insurance premiums as a proportion of GDP. Insurance penetration on this measure was highest in Taiwan with 8.%, followed by South Africa.8%, the and Netherlands each with around.%. Globally, insurance penetration averaged.9% in (Table ). Chart 7 Gross Reinsurance Premiums % share, 9 Africa and Middle East Latin America % Asia and % North America Australia 9% Europe 8% Total: $8bn 7% Source: Interational Association of Insurance Supervisors Reinsurance Reinsurance is the cover insurers purchase to protect themselves against any large losses. Since major risks are transferred to reinsurers, the primary insurer only needs to retain capital on its balance sheet to cover its share of the risk. Reinsurance therefore provides additional underwriting capacity. Non-life insurance premiums generate around three-quarters of overall reinsurance premiums. This is because life insurance products mainly consist of savings which have a small insurance risk component and are therefore typically not reinsured. Latest available data shows that North America generated the largest share of global reinsurance premiums in with 7% of the total (Chart 7). It was followed by Europe 8% and Asia/Australia 9%. The London Market plays an important role in the global reinsurance market and accounts for between % and % of global non-marine treaty reinsurance and a quarter of internationally available reinsurance. Table Largest global reinsurers Munich Re Swiss Re Hannover Re Berkshire Hathaway Lloyd s SCOR Reinsurance Group of America Allianz Partner Re Everest Re Other Total market Source: AM Best Company, Swiss Re Domicile Germany Switzerland Germany France Germany Bermuda Bermuda Gross written premiums $bn % share 7 7

7 INSURANCE DECEMBER The reinsurance industry is highly concentrated at the top end with the largest five reinsurers accounting for over half the market. Companies from Switzerland, Germany and the dominate the rankings. Munich Re was the largest company in with % of global reinsurance gross premiums, followed by Swiss Re Group % and Hannover Re 7% (Table ). Lloyd s is in the top five reinsurers globally with a % market share. Despite the dominance of largest companies, there are a number of smaller market participants which tend to concentrate on their home country. Global insurance companies manage funds totalling $. trillion Chart 8 Insurance companies assets under management Insurance investment funds According to TheCity estimates, at the end of, insurers held $. trillion of funds under management, about four-fifths of which was from life insurance and the remainder mostly from general insurance lines such as property and casualty insurance. companies accounted for over a quarter of the total, followed by Japanese companies % and and French companies with around % each (Chart 8). invested assets under management, $bn, 7,,,,, Non-life Life Insurers typically invest conservatively, focusing on highly-rated assets. In most countries this is enforced and controlled by regulation. The direct impact of the financial crisis on insurance companies investments was limited due to the wide diversification in insurers investment portfolios. Subprime mortgage investments of insurance companies totalled around $8bn in 8 or less than % of invested assets. Asset allocation around the world varies considerably. and insurers typically invest a larger proportion of funds in equities than other developed countries. Insurers in the and globally have however reduced the share of equities in their investment portfolio. Insurance companies Allianz Worldwide was the largest global insurance company in in terms of revenue with around $bn generated during the year. It was followed by Axa $bn and AIG $7bn (Table ). The list of the largest property and casualty insurance companies is dominated by German and companies while Japanese companies featured prominently in rankings of largest life insurance companies. The had three companies amonths the largest ten, AVIVA ranked th in terms of revenue, Legal & General Group 8th and Prudential 9th.,, Germany Japan France Netherlands Source: Swiss Re, EA Statistics, TheCity estimates Table Largest insurance companies $bn Allianz Worldwide AXA AIG Generali Group AVIVA Zurich Financial Services Munich Re Legal & General Group Prudential Aegon Source: Forbes Country Germany France Italy Switzerland Germany Netherlands Revenue Assets, Market value Insurance brokers In recent years the pace of consolidation has slowed amongst the major brokers. Merger activity at the smaller end of the broker sector continues. firms dominated the rankings in with eight out of the top ten places. Two firms, Willis and Jardine Lloyd Thomson, were from the (Table ). Aon Corporation and Marsh & McLennan were by far the largest, generating nearly two-thirds of revenue of the top ten brokers. All of the largest firms have a substantial presence in London. Despite the dominance of the largest brokers, niche players in the market gain competitive advantages from flexibility and specialism. In almost all of the EU Member States for which there exists detailed information on the relative importance of different insurance distribution channels, insurance intermediaries are a very important channel, accounting for more than a half of all premiums. Table Largest insurance brokers Aon Corp Marsh & McLennan Cos. Inc. Willis Group Holdings Ltd. Arthur J. Gallagher & Co. Wells Fargo Insurance Services Inc. Jardine Lloyd Thomson BB&T Insurance Services Inc. Brown & Brown Inc. Lockton Cos. LLC Hub International Ltd Source: Business Insurance Domicile Brokerage revenues $m,,9,,79,,8,

8 INSURANCE DECEMBER THE INSURANCE MARKET Net worldwide premium income of the insurance market fell by % in to 98.7bn (Table 7, Chart ). The % increase in general insurance premiums during the year was more than offset by the % decline in long-term premium income. Long-term business accounts for more than three-quarters of premiums. Premium income in was about a quarter off the peak in 7. The insurance industry paid out over bn in claims and other outgoings in (Chart 9). It should be noted that these figures only include data supplied to the ABI and do not include estimates for non-suppliers or Lloyd s (see London Market section on page ). The figures also do not take into account overseas premium revenue generated by foreign branches and subsidiaries in the, which are not required to report their income to the authorities. insurance companies are well capitalised and there has been no requirement for an external capital injection to a insurance company from the Government since the start of the economic downturn. Some insurance companies have however raised additional capital by selling parts of their business or through rights issues. Overseas premium income In, member companies of the Association of British Insurers earned total world-wide long-term premium income of.bn, of which more than a quarter was from overseas. Their worldwide general insurance premium income was.bn, of which about % was from overseas. This implies total overseas premium income of around bn, most of which was from the EU and. Combined with Lloyd s and London Market insurers, it is estimated that the full figure for overseas premium income is in the region of 7bn. Number of companies The number of companies authorised either by the or by another European Economic Area member, to carry on insurance business in the totalled 9 at end-march (Table 8). This figure does not include the 9 services of EEA companies located in the. The number of insurers authorised to write business in the has gradually fallen over the past decade although there has been a significant increase in their average size. In practice, fewer insurers actually write insurance than are authorised to do so. Table 7 insurance industry net worldwide premiums bn risks Long-term General Overseas risks Long-term General Total Long-term General 'Net' defined as net of reinsurance ceded; this table only includes data supplied to the ABI and no estimates have been made for non-suppliers. It also excludes Lloyd's business. Table 8 Insurance companies authorised in the Premium income of insurance market down % in to 98 billion General Life Composite Total of which (%) Foreign owned owned data is for end-march figures exclude services of EEA companies in the Source: Financial Services Authority Chart 9 Benefits paid by the insurance industry Despite a spate of mergers and acquisitions in the past few years, and the arrival of many European and companies, the insurance industry remains predominantly -owned with the exception of the London Market. Since 99, companies with a head office in another EU or EEA country have been allowed to operate in the under a license from their home country supervisory authority. Around a fifth of insurance companies in the are foreign owned. bn Long-term General 8 Long-term insurance 8 Long-term insurance includes income protection insurance and pensions, in addition to basic life insurance, endowment policies and annuities. Net worldwide long-term premium income of the insurance industry declined by % in to.bn (Table 7). This was due to a decrease in domestic premium income, particularly occupational pensions premiums

9 INSURANCE DECEMBER insurance industry: payments and other outgoings In, the general insurance industry paid out: - Nearly bn on households contents insurance. An average fire claim cost 7,9; a theft claim,, and a claim following a major flood between, and,. - Some bn in motor insurance claims, nearly four fifths of this for private vehicles and the remainder for commercial vehicles. - bn in claims on liability insurance. - bn in accident and health claims. - between bn and bn on miscellanious and pecuniary loss claims. Some 8. million households in the benefit from long-term insurance products. In : - bn was paid in benefits to pensioners and long-term savers. - bn was paid in death and disability benefits. - there were 9bn of transfers of pension funds to other insurers or pension fund managers. Chart insurance industry net worldwide premiums bn % Long-term General 9% % % and life insurance premiums. Overseas business showed a small increase during the year. Industry data for new long-term premium income in the first three quarters of showed a drop of.% on the same period in to 7.bn (Chart ). Premiums paid to insurance institutions are invested in order to meet the liability at maturity. Long-term insurance funds increased by nearly % in to a record,97bn (Chart ). The increase was largely due to a recovery in equity markets during this period. Domestic business Insurers act in partnership with Government to explore options to increase savings and protection provision and to help consumers manage financial distress in their daily lives caused by accidents, ill health or old age. Domestic business generated more than three-quarters of longterm premiums in or.bn (Table 7). Occupational pensions accounted for % of this, individual pensions 9% and life insurance 8% leaving a small residual (Chart ). Chart New long term business premiums million (single and regular premium business),,,,, qqqqqqqqqqqqqqqqqqq Pensions generated 88.8bn in domestic premiums in, an 8% decline on the previous year and down a third on the peak three years earlier. This was largely a result of the weakness in the wider economy which has resulted in lower contribution to pensions. Life insurance premiums totalled.bn in, slightly down on the previous year and % below the peak in 7. Life business can be categorised into: - Regular premium business where premiums are paid in over the term of the policy at specified intervals, usually monthly (half of which is mortgage related). Such business has declined % in to around 8bn; - Single premium business which consists of premiums that are paid in a single lump sum. They increased % in to some bn. Despite the increase in single premium business remains well down on levels seen since the start of the decade. 7

10 INSURANCE DECEMBER Overseas business accounted for a quarter of all long-term premiums and 7% of benefits paid in. Overseas long-term premiums more than doubled during the past decade to around.8bn in. Most of this was the result of an increase in single premium business. The EU was the most important overseas market for insurers in with % of longterm overseas premiums, followed by the with around %. Largest companies The long-term insurance market has become more concentrated over the past decade with the largest ten companies in the accounting for more than four-fifths of the market in (Table ). AVIVA plc and Standard Life plc accounted for a quarter of the market. The number of long-term insurers decreased from 7 to 8 in the decade up to the end of (Table 8). This was due to competitive pressures resulting from the concentration of the global insurance industry as companies diversified into new markets and increased efficiency through economies of scale. Insurance companies are also facing greater competition from institutions outside the traditional insurance sector. General insurance General insurance covers a wide range of risks. Contracts are in force for a fixed period, usually one year and are utilised by both companies and individuals. worldwide general insurance net premiums (excluding Lloyd s) increased by % in to.bn (Table ). Including estimates for non-suppliers and Lloyd s, general insurance net written premiums totalled bn in (Table ). Risks covered by general insurance include: - Motor insurance A substantial proportion of growth in general insurance premium income during the past decade stemmed from an increase in motor insurance which accounted for around a fifth of domestic general insurance premiums in or.8bn. - Property insurance This is the second largest business line and made up 7% of general insurance premiums in with net written premiums of 9.bn. The increase in mortgage borrowing over the past two decades has increased demand for property insurance. - Accident and health business Premiums from accident and health business have increased steadily during the past decade reflecting their importance to both businesses and individuals. They accounted for 9% of general premiums in or.bn. - Marine, Aviation and Transport (MAT) insurance Lloyd s generates the bulk of such insurance totalling.7bn in. Lloyd's syndicates also accounted for around % of motor business, while the market's ability to write specialised risks accounts for its % share of the domestic liability market. Table 9 companies long-term insurance worldwide bn Premium income of which contracts Overseas contracts Benefits paid of which contracts Overseas contracts Chart Domestic long-term insurance net premium income bn % Life insurance 8% Table Largest long-term insurance companies worldwide net premium income, % % % Other AVIVA Standard Life plc Lloyds Banking Group Aegon NV Prudential Resolution Ltd Legal & General Zurich Financial Services Old Mutual plc Royal London Mutual Others Total Size of fund,,9 Occupational pensions Individual pensions m 9, 8,9 8,,7,9,8,,97,97,887,9 7, , % % 9% ,79 % share Pecuniary loss and general liability This line generated most of the remaining general insurance premiums. Pecuniary loss premiums increased by % in to.bn. 8

11 INSURANCE DECEMBER Overseas business Nearly a third of general insurance premiums originated overseas in. The most important markets were the EU (primarily Ireland, Netherlands, Denmark and France) with % and Canada 7% (Table ). Insurance capacity For general insurance the levels of written premiums and reserves provide a guide to the capacity of the market or the maximum amount of insurance it will be prepared to accept. In addition to reserves required to meet their estimated liabilities, general insurers are legally required to hold additional funds of between % and 8% of net written premiums. In practice companies hold a much greater margin. Total free reserves increased at a faster pace than premiums since (Chart ). Insurers have gradually reduced their exposure to equity markets during the past decade so were not affected by the volatility in equity markets since the start of the economic downturn to the same extent as they were during the previous equity market correction in and. Underwriting and trading results The underwriting results of general insurers were negative in 9 and, that is, total outgoings from general business (i.e. claims, expenses and commission and changes in reserves) have exceeded total premium income. It is common for insurers to make a loss on their underwriting once claims, commissions and other expenses are deducted from premiums. However, this loss should be more than recovered by income received on the investment of technical reserves and other assets. Normally there is a time lag from the receipt of premiums until claims are made and settled. During this period the capital can be invested to generate income. As long-term investors, insurance companies held around a third of investments in equities, although this proportion has decreased from around a half five years earlier. Insurers have historically derived around -% of their revenue from investment income. Insurers trading profits fell from.9bn to.bn between 9 and Solvency II Solvency II is a fundamental review of the regulatory regime for the European insurance industry. It aims to unify the EU insurance market and enhance consumer protection. The new harmonised insurance regime will cover authorisation, corporate governance, supervisory reporting, public disclosure, risk assesment and management, and solvency and reserving. Solvency II is the largest ever change to European insurance solvency regulations. The European Commission has estimated total costs of implementation for the industry in Europe to be -bn over years. Table general insurance worldwide net premiums bn Annual business Motor Non-motor MAT Non-MAT reinsurance Funded business MAT Non-MAT reinsurance Other funded business Total premiums of which Overseas EU Canada Australia New Zealand Other % Overseas figures exclude home-foreign business this table only includes data supplied to the ABI and no estimates have been made for non-suppliers. It also excludes Lloyd's business Table Shares of general insurance premiums bn, general business net written premiums risks - motor - accident and health - property - general liability - pecuniary loss Total risks Home-foreign Non-MAT reinsurance MAT Total Chart insurance general premiums and reserves bn % figures in this table are different from those in previous tables as they include estimates for non-suppliers and Lloyd s The implementation date for Solvency II is being negotiated in Europe. The current assumption is that transposition of the Directive into national legislation would have to be completed by January. However, Solvency II requirements would not apply to insurers until January. This is in light of the challenging timelines and the need to ensure sufficient time is given for all supervisory processes to be in place when the regime is implemented. Transitional provisions on certain aspects of the Directive are also being discussed Net written premiums Total free reserves Solvency II will be adopted by all 7 European Union (EU) Member States plus three of the European Economic Area countries. As a consistent European standard, Solvency II should help to protect policyholders' interests more effectively by making firm failure less likely, and by reducing the probability of consumer loss or market disruption excludes foreign branches and subsidiaries in the 9

12 INSURANCE DECEMBER. Investment income increased to.bn from.bn partly due to the recovery in equity markets during this period. There was however a deterioration in underwriting performance from a loss of.bn in 9 to a loss of.bn in. This was largely a result of an increase in losses from motor business only partly offset by positive results from other business lines. Insurers and reinsurers have sought to counter the effects of the economic slowdown. Many firms have adopted a long-term approach to cost reduction such as using technology more effectively and re-engineering business processes. Emphasis has also been placed on outsourcing back office functions to outside firms. This has allowed insurers to focus more on their core business. Some firms have turned to offshore locations in order to achieve savings. Largest companies The general insurance market is one of the most concentrated in Europe as a result of large-scale merger activity. The largest ten general insurance companies handled around two-thirds of business in. RBS Group with.bn in premium income and AVIVA.bn alone accounted for more than a fifth of the market (Table ). Run-off market "Run-off" means the management of liabilities and exposures left behind when an insurance or reinsurance company stops underwriting a business. Insolvency has been the biggest factor that has forced companies to cease underwriting and go into run-off. The,, Bermuda, Japan, Germany and France account for the bulk of this market. The size of the run-off market has grown significantly over the past two decades. This was primarily due to large catastrophe losses. It is now regarded as a separate part of the market with its own specialists and its own department at the FSA. According to the latest KPMG Run Off Survey, liabilities of the general insurance run-off market amounted to 7.bn at the end of, down some 9% on the previous year (Table ). The total represented around % of the general insurance market as a whole, down on % in the previous year and 8% two years earlier. Since, liabilities in the non-life run-off market have fallen steadily apart from in 8 when run-off liabilities spiked due to the financial crisis and its impact on specialist monoline insurers. Distribution Insurers can sell their products either directly to customers or through tied agents and independent intermediaries. Innovative distribution channels have made strong headway on the insurance market although traditional sales channels still retain overall dominance. Long-term insurance Independent financial advisors (IFAs) and direct salesforces generate most of new business for long-term insurance (Chart ). Bancassurance has grown in recent years mirrored by a fall in tied and other direct salesforces. Independent financial advisors (IFAs) sell long-term insurance products. They Chart worldwide general insurance trading result bn Trading result 8 Investment income 7 Underwriting results Table Largest general insurance companies worldwide net premium income, The insurance industry claims and other outgoings totalled bn in RBS Group AVIVA AXA Insurance RSA Insurance Group Zurich Financial Services Munich Re AIG Allianz BUPA Lloyds Banking Group Others Total m,7,,,,8,,9,77,8,,7,97 Table general insurance run-off market % share Liabilities % annual bn share % change General insurance run-off market - Solvent company run-off - Insolvent company run-off - Equitas (Lloyd s 99 and prior) - Lloyd s (99 onwards) Active market Total

13 INSURANCE DECEMBER Other services Other auxiliary services cover the traditionally recognised insurance services such as loss adjusters, actuaries and other support services that include financial, computing, recruitment, legal services, risk management and consultancy services. Loss adjusters play a fundamental role as independent claims specialists who verify the liability of an insurer for a claim. The Chartered Institute of Loss Adjusters, to which the majority of practitioners belong, has around, members. Loss adjusters' fees are paid by the insurers who rely on them to check claims for quantity, description and pricing. For most claims insurers are able to make a payment immediately but in some cases they may send a claims inspector to check upon the circumstances. For larger or more complicated claims, insurers employ the skills of a loss adjuster. Actuaries are employed by insurers, Lloyd's syndicates and consulting organisations. In life insurance, each company is required by law to have an Appointed Actuary. Using probability theory and life-expectancy data to estimate levels of risk, one of their principal roles is to set premium rates for life insurance and personal pension policies and to advise on bonus payments. They also may be involved in product development, marketing, portfolio management and a range of managerial roles. With the availability of more detailed statistics, actuaries have become more involved in general insurance. act as a representative of the customer and their role is to provide advice to the client. Most IFAs are small independent companies and brokers although some banks and buildings societies also own IFAs. In, IFAs generated over three-quarters of new long-term premiums, having gradually increased their share in recent years. General insurance Latest available data shows that for general insurance, brokers are the dominant distribution channel although their share fell to 8% in from around two-thirds a decade earlier. Company agents share fell from % to 7%. Direct selling saw the biggest increase during this period, from 7% to % of the total. Bancassurance accounted for most of the remaining premiums. Independent intermediaries Traditionally the role of insurance brokers has been to act as intermediaries in the placing of insurance business for their clients, negotiating the price and scope of coverage and advising clients on the design of their risk programs. Brokers and intermediaries account for the largest share of insurance distribution in the, in particular of commercial business. The share of independent intermediaries fell slightly in the decade up to for general insurance commercial lines, to four-fifths of the market. Independent intermediaries accounted for % of the personal lines market, down from a half a decade earlier (Chart ). Chart Sources of new long-term premiums % share 8 7 Independent Financial Advisers Direct salesforce, tied agents and other Non-intermediated Chart Sources of general business premiums % share 8 % % % % Personal Independent intermediaries % % 8% % Company agents % 7% % 88% Commercial Direct % 9% 8% 8% Other Company agents include direct sales forces and tied agents. Direct sales forces are sales personnel employed by insurers whereas tied agents represent intermediaries who sell the products of one particular insurance company but are separate from it. Company agents accounted for around 8% of general insurance business in. Direct selling represents the sale of insurance directly by insurers and consists almost entirely of direct telesales. In it generated % of personal lines general insurance premiums and 9% of commercial business.

14 INSURANCE DECEMBER Most of the increase in personal lines business was in motor insurance distribution, the accident and health sector and household property insurance. Banks and building societies (bancassurance) Despite difficulties resulting from the recent global economic downturn, banks and building societies have certain advantages in selling insurance products, such as an established customer base from their general banking business along with the corresponding databases of information. Overall, in the, banks and building societies distributed around 7% of general insurance in, down from % two years earlier. THE LONDON MARKET The London Market is the world s leading market for internationally traded insurance and reinsurance. It is a distinct, separate part of the insurance and reinsurance industry centred in the City of London. The London Market consists mostly of general (non-life) insurance and reinsurance, and predominantly involves high-exposure risks. It enjoys a unique status in the global insurance industry as it offers a market place for those risks that cannot easily be placed in local markets, including policies that may contain complex features. The international insurance and reinsurance companies on the London Market are located in a small area, with virtually all of the business being written within the Square Mile of the City. This is probably its most important competitive advantage as it produces close ties between buyers, brokers and insurers, and facilitates access and the flow of information amongst all participants. London Market participants The main operators in the London Market are insurance companies, Lloyd's, Protection and Indemnity (P & I) Clubs and brokers (Table ). There is also a concentration of highly specialised service providers including claims adjusters, actuaries, lawyers, accountants and consultants. During the past decade, the London Market has been going through a significant consolidation process during which the number of insurers has more than halved. This occured not only amongst insurance companies but also amongst Lloyd s syndicates and brokers. There has at the same time been a significant number of entrants, both at Lloyd s and within the Company market, backed by a diverse range of international capital. The London Market has become more international in both the sources of its business and the ownership of its participants. Three-quarters of companies operating there are foreign-owned and many brokers are members of larger broking groups, many of which also have overseas owners. Lloyd's is not an insurance company. It is a market place, housing a range of insurers providing different products, overseen by the Corporation of Lloyd's. Lloyd s insures specialist and complex risks in casualty, property, energy, motor, aviation, specie and reinsurance as well as in marine. Throughout its year history it has gained a reputation for innovation and expertise, for example developing policies for aviation, burglary and computer fraud, and is known across the world as the place to bring Table London Market active participants end- IUA Marine P&I Clubs Lloyd's syndicates Lloyd's market brokers Number 8 78 November - IUA 'Ordinary' members; figure only includes members of the International Group of P&I Clubs Source: IUA, Lloyd's, P&I Club All of the world s largest insurers and reinsurers have offices in The London Market

15 INSURANCE DECEMBER unusual, specialist and complicated risks. It is one of the world s largest commercial insurers and the fifth leading reinsurer (Table ). Throughout Lloyd s long history there have been a number of changes, but its basic market principles have remained the same. One of the most important of these is the way that business is done face-to-face on the underwriting floor. Brokers bring their clients risks to underwriters who decide whether they will accept all or part of the risk. If the value of the insured risk is very high, then the broker may arrange for it to be spread across several syndicates, which each of them subscribing to a part of it. Lloyd s also delegates responsibility to local brokers called coverholders to undertake business on behalf of syndicates or managing agents. Lloyd s holds licences, supported by a network of local offices, to conduct direct insurance business in over 7 jurisdictions. Lloyd s is a society of individual and corporate members each of whom accepts insurance risks as members of one or more underwriting syndicates. Capital is supplied on the basis of an annual venture, with continuing support from providers needing affirmation each year. Where a corporate member and a managing agent of a syndicate are owned by the same company or part of the same corporate group, that capital provider is described as an aligned member. A small number of Individual members (traditionally known as Names ) are liable to the full extent of their private wealth to meet their insurance commitments, while the corporate entities trade with limited liability. Individual members can also underwrite at Lloyd s with limited liability by participating in a variety of investment vehicles. The day to day running of syndicates is undertaken by managing agents, who must supply the Corporation of Lloyd s with information about performance as well as agree the strategic direction of the syndicates they are responsible for. The consolidation at Lloyd s has been even greater than on the company market. The number of syndicates fell by a half in the decade up to to 8 (Table and Chart 7). During this period Lloyd s average syndicate capacity increased nearly four-fold to 9 million. Table Lloyd s active membership Number of Active members Individual Corporate Syndicates Source: Lloyd's 99,88,7 7,7,7 8, 7, 8 Chart 7 Lloyd s syndicates and managing agents No. of syndicates & managing agents (lines) No. of syndicates Managing agents Lloyd s has a year history Sep-, 7,9 8 Average syndicate capacity, m (bars) Source: Lloyd s Lloyd's businesses are independent and operate within the wider franchise operated by the Corporation of Lloyd's. Working with the market, the London Market Group The London Market Group (LMG) is a cross-market body that aims to bring about reform of processes in the London insurance market. A key focus of the LMG's work is aimed at identifying areas where improvements can be made to maintain and enhance London s position in the international insurance market. The London Market modernisation programme consists of a number of projects designed at increasing efficiency in placing business, in processing claims and in settling accounts. The LMG provides the overall governance. The London Market modernisation programme has been in place since 999. Over this period initiatives have included: the succesful adoption of contract certainty across the market; the adoption of the standard slip; the delivery of the Insurers' Market Repository; the adoption of the Electronic Claims File; the removal of paper from the Accounting and Settlement process; the adoption of electronic policies; and the introduction of electronic support for placing and endorsements.

16 INSURANCE DECEMBER Corporation of Lloyd's seeks to achieve underwriting profit, attract a strong common rating and mutual security, and attract the highest quality management and underwriting talent. Lloyd s overall objective is to be the market of choice for insurance and reinsurance buyers and sellers to access and trade both specialist and large property and casualty risks. Company market London company market participants include: companies operating from London offices that are members of the International Underwriting Association (IUA), other companies with London underwriting offices; EEA licensed insurers and reinsurers operating from a European office; contact offices of foreign companies not authorised to transact business in the ; and P & I Clubs and other marine mutuals. The London Market is the only place in the world where all of the world s largest insurers and reinsurers have offices. The IUA is the world s largest representative organisation for international and wholesale insurance and reinsurance companies. It exists to promote and enhance the business environment for international insurance and reinsurance companies operating in London. Brokers are a key part of the London Market, bringing into it from their networks of offices around the world the vast majority of the insurance and reinsurance risks placed with both Lloyd s syndicates and the companies. Only a small proportion of London Market business is placed directly with insurance companies. The number of brokers on the London Market has declined in recent years, due to mergers and corporate restructuring. The number of Lloyd s brokers totalled 78 at the end of, down from over a decade earlier. Gross premiums on the London Market increased % in to a record.9 billion Chart 8 London Market gross premium income bn Total:.bn Total:.9bn 9.7. Source: ABI, International Underwriting Association (IUA) P&I Clubs Insurance companies Lloyd's.8 Protection and Indemnity Clubs (P & I Clubs) and other mutuals P & I Clubs are mutual insurance associations of shipowners and charterers. They form the largest group of London Market mutual associations, which differ from proprietary insurance companies in having risk capital subscribed by their policy holders rather than shareholders. Marine P & I Clubs were created to serve the marine industry and they mainly insure their members against risks not covered by the Lloyd's and marine companies' policies. This includes collision damage and liabilities for loss or damage to cargo, pollution, loss of life or personal injury on ships, and collision liability, including damage to port installations. Premium income Gross premiums on the London Market totalled.9bn in, up % on the previous year s total (Chart 8). This was double the premiums generated a decade earlier. In Lloyd s generated % of identified London Market gross premiums, with the company market generating %. P & I Clubs accounted for the remaining %. It should be noted that these figures represent conservative estimates and do not include for example activities of insurers who write London Market risks, but from outside the. Consequently the value of actual premium income of the London Market may be increasingly understated. Lloyd's premium income on the London Market totalled 9.7bn in, up from 9.bn in the previous year. It accounted for the largest share of London Market premiums in. Lloyd s profit before tax of.bn in

17 INSURANCE DECEMBER was down from.9bn in the previous year (Chart 9). The reduction in profits reflects the challenging conditions facing global insurance and indeed London and Lloyd s in /. The prevailing low interest rate environment has constrained investment returns while high levels of capital in the industry have driven down rates. Lloyd s reported a pre-tax loss of 97m in the first half of due to the toll of natural disasters, such as Australian floods, New Zealand earthquake, Japanese earthquake and tsunami and storms. This has contributed to making one of the most challenging years on record. Since January, Lloyd s main market financial reporting regime has moved from a three-year fund accounting basis to an annual accounting basis under Generally Accepted Accounting Principles. Lloyd s market capacity, or the maximum volume of insurance premiums, after deduction of brokerage, the market can accept in a single year totalled.bn in. Since 99 there has been a major restructuring of the market with the introduction of corporate capital. This resulted in a decrease in the number of syndicates and large increase in the average managed capacity. The providers of capacity have also changed as the proportion of individual capital in the market has steadily decreased during this period. Company market The International Underwriting Association (IUA) estimates that gross premiums in this part of the market totalled around.bn in, up from.9bn in the previous year. In an effort to increase profitability and improve their capital base insurance companies have shown greater emphasis on cost control and underwriting discipline in recent years. There is no precise data on the overall performance of the company market mainly because the published accounts for a large number of companies do not show London Market business separately. P & I Clubs gross premiums in the London Market totalled around 7 million in, down from 87 million in the previous year. Most of P & I Clubs premiums were in MAT & MAT reinsurance. London is the biggest centre for marine protection and indemnity insurance offered by P & I Clubs. The s share of global marine P&I premiums was % in (Chart ), still much the highest share but the lowest in the past decade when it has typically been between % and 7%. The next largest centres for marine mutual insurance were the Nordic countries, with a 8% share, with the balance being made up by Japan and the. Chart 9 Lloyd s financial highlights bn,,,,, -, first months Source: Lloyd s Capital reserves and subordinated loan notes Profit before tax Gross premiums written 7 Chart Premiums of P&I Clubs $bn,,,,,, % 7% % 8% Japan 8 Nordic Source: IUMI - International Union of Marine Insurance 7% 8% % % Types of insurance traded on the London Market London is a key global centre for cross-border insurance and reinsurance, particularly for marine and aviation business. It had the largest market share of global marine net premiums in, accounting for a fifth of direct marine premiums (Chart ). Japan was the next largest market with % but the bulk of its business was from its own domestic market. London is also the market leader in aviation insurance along with the and France. In terms of global non-life premiums, London Market s share is only around %, but its share of industrial insurance business is higher at between % and %. These figures do not always reflect the relative importance of London Market business as some business not included in these figures will depend on intellectual capacity of the leaders in London but is written overseas.

18 INSURANCE DECEMBER Lloyd s Cross-border business accounts for most of business placed at Lloyd s. Reinsurance premiums accounted for the bulk of business with a 7% share in (Chart ). This was up from around % a decade earlier. The London Market is estimated to account for a quarter of internationally available reinsurance. Most other lines of business saw only a small change in their share of the total during the past decade. Property was the next largest business line in generating % of premiums, followed by casualty %, marine 7%, energy %, motor % and aviation %. Company market Property was the most important business line for the company market in, generating % of total company premiums (Chart ). It was followed by casualty 8%, professional lines %, marine % and aviation %. A breakdown of business for marine and aviation business (excluding treaty amounts), shows that the company market generates a bigger share of aviation business. In marine insurance, however, the story is reversed with Lloyd s generating more premiums in the marine and energy classes (Chart ). Chart International marine insurance premium income % share of direct marine premiums Others 7% Germany % % 8% Source: International Union of Marine Insurance % 9% China Japan Chart Lloyd s premium income by class of business London Market premium income by region An important feature of London Market business is its wide geographical distribution. Over the past decade the geographic spread of business done by London Market insurers has changed. Although the matu % share Reinsurance Property re markets of the and Western Europe remain the major sources of income, growth in insurance in these countries is slower compared to the developing markets of Latin America, Asia and Eastern Europe. It should be noted that there is no accurate breakdown of geographical sources of premium income on the London Market as a whole due to the difficulty in determining the geographical origin of some types of business such as MAT and non-marine treaty reinsurance which may be generated in more than one country. Source: Lloyd s 7 Marine 8 Casualty 9 Energy Motor Aviation Lloyd s The geographical breakdown of business done by Lloyd s shows that North America was the most important source of its business in with % of premiums. Lloyd s is one of the leading providers of direct insurance and reinsurance to the attracting around a fifth of outward reinsurance and half of primary insurance placed abroad. The generated a fifth of overall Lloyd s premiums followed by rest of Europe, % (Chart ). The remainder of business originated from emerging markets, which has generally been on a rising trend over the past decade. Business can be undertaken in many territories with Lloyd s operating in over countries and territories worldwide. In 7 Lloyd s opened an onshore reinsurance operation in Shanghai, gaining a strategic foothold in one of the world s fastest-growing insurance markets. The operation has experienced meaningful growth, writing $m in reinsurance premium income in. Lloyd s has expanded its access to the rapidly developing Chinese insurance market through the acquisition of a direct licence in May. Chart Company market premiums by class of business % share, Marine Prof lines Aviation % % % 8% Total:.7bn % Casualty Source: International Underwriting Association (IUA) Property

19 INSURANCE DECEMBER Company market According to the International Underwriting Association (IUA), the plays a more important role as a source of business for the company market than for Lloyd s, accounting for % of premium income compared with % for Lloyd s. The company market is smaller than Lloyd s in business with only % emanating from surplus lines and reinsurance business in compared to % for the Lloyd s market. The company market s share of mainland European business at 7% is similar to Lloyd s as is business emanating from territories other than, and Europe at % (Chart ). Chart International marine insurance premium income bn premium... Lloyd's Company market... Marine and energy Aviation Comparison figures are not available for treaty Source: International Union Association (IUA) Chart Lloyd s premium income by region % share 9% Rest of world % 8 % Rest of Europe % % % 7% Americas % Source: Lloyd s Chart London Market premium income by region % share, % Other EU Other % % 7% % % % % Company market Lloyd's Source: Lloyd s; International Underwriting Association (IUA) 7

20 INSURANCE DECEMBER CONTRIBUTION TO THE ECONOMY Output Insurance corporations and pension funds accounted for approximately.% of GDP in or some.bn. This was nearly % of the contribution financial services as a whole (Chart 7). Income from large overseas investments of the sector is not included in these figures as it is not part of GDP. This measure also excludes brokers and other auxiliary professions. According to the British Insurance Brokers Association (BIBA) the total direct contribution of the general insurance brokers to GDP is about.7%, while their total direct and indirect contribution rises to around.%. It should be noted that the output of the insurance sector can be heavily impacted by large claims which cause a reduction in value added. Employment Chart 7 output GDP index = 8 7 The insurance sector accounts for.% of GDP and.% of employment Financial services Banking Employment in the insurance sector totalled, at the end of, up % on the previous year. Around one third of this was in activities directly related to insurance and the remainder in auxiliary activities such as insurance agents, brokers and actuaries. Employment in insurance was down around % on a decade earlier. Job cuts were due to post-merger rationalisations, rise in direct sales and cost cutting in the insurance arms of large financial institutions. In total, insurance and pension funds accounted for % of financial services employment and.% of total employment (Table 7). The London Market provides employment for around, insurance employees in the City of London and adjacent areas. In addition to this, the London Market also generates around, jobs in other parts of the country which help in administrating its business. Net exports The insurance industry generates net exports by selling cross-border insurance and reinsurance cover. Auxiliaries, such as brokers, also generate net exports by earning commission on the placement of cross-border risks. 9 Insurance Source: Office for National Statistics Table 7 employment in the insurance sector m, London South East South West North West East Scotland West Midlands Yorkshire and The Humber Wales Northern Ireland East Midlands North East Total Total GDP Life insurance business,,8,,,,,, 9 -, Non-life ins. business,7,, 8,,,,,,,,,8 7,9 Source: Office for National Statistics; TheCity estimates Auxiliary to insurance,9, 7,9,,, 8,8 7,,,,,, Total 8,7 8,,8, 8, 7,7 7,,,,,,, Insurance net exports fell to.bn in from.bn in the two previous years (Chart 8, Table 8). Reinsurance, other direct insurance and insurance brokers all made significant contributions to net exports, each in the region of bn. Net exports of life insurance and pension funds continue to show a shortfall, which reached.bn in. Table 8 insurance net exports m Insurance trade balance (Pink Book Table.) Life insurance and pension funds Freight insurance Other direct insurance Reinsurance Insurance brokers Insurance trade balance Deduct: Imports of freight insurance Net exports of insurance sector Source: Office for National Statistics