Loyalty at a Premium

The way we buy motor insurance has changed significantly over the past few years. Thanks to the advent of price-comparison websites, three-quarters of drivers shop around before renewing their policy, according to research by Ipsos/MORI, and almost half get up to three quotes before making a decision. The consequence of this is significantly lower levels of loyalty. The proportion of consumers who have been with their existing provider for five years or more has dropped from 31% in 2001 to 23% in 2009. Older drivers tend to be more loyal, while those in the 1 7- to 34-year-old age group switch more frequently.

Brand identity is also poor in this sector, as differentiation and trust are not easily achieved: frequently, consumer choice comes down to premiums.

Total net written premiums (NWP) were Pounds 7.8bn in 2007 and an estimated Pounds 8. lbn in 2008, according to Mintel an upward trend that will continue. Yet the industry continues to suffer from a lack of profitability, recording an underwriting loss of Pounds 398m in 2007, though this is estimated to have improved to a Pounds 288m loss in 2008.

Average premiums have shot up since 2007 as insurance companies look to get the market back to underwriting profitability. Meanwhile, the number of private car-insurance claims fell to 4m in 2008, a drop of 7% compared with 2007. Yet while the volume of claims fell, their costs have risen: increasing 14% between 2003 and 2007.

The industry is also seeing a bigger number of personal-injury claims. Due to the higher cost of processing as well as legal expenses, this may have a knockon effect of raising premium costs.

As it is a legal obligation to have car insurance to drive, the sector is relatively recession-proof. The only way it can be hit is if high numbers of drivers give up their cars.

One problem is the number of uninsured drivers on the road: it is estimated there are 1.6m vehicles in the UK being driven without insurance, at a cost to the companies of Pounds 500m a year, or an extra Pounds 30 per premium. The police have managed to clamp down on uninsured drivers, using automatic number plate-recognition technology, and the government is now considering making it tougher for people to keep an uninsured vehicle.

While car manufacturers are struggling, the number of cars in the UK has increased steadily over the past few years as a result of multiple car ownership and population growth.

Comprehensive insurance is the most common type taken out, accounting for more than 90% of vehicles in 2008, according to the Association of British Insurers.

Insurance brokers used to be the sole route for multiple comparisons but online price-comparison sites have changed this. Direct sales grew from 29% in 2000 to almost 50% in 2007.

RBS is the leading provider of motor insurance in this country, accounting for about a third of the market by gross written premiums (GWP) in 2007. The top five players, which also include Aviva, RSA, Zurich and Fortis, account for 66%, with a total GWP of Pounds 5.4bn.

Norwich Union has just rebranded as Aviva with a high-profile ad campaign. One of its points of difference is that named drivers can earn their own noclaims discounts with its comprehensive insurance. Last year it withdrew its products from aggregator sites and launched its own comparison service.

Over the next five years, Mintel predicts there will be a gradual return to underwriting profitability as insurers make a combined effort to improve market conditions, so that by 20 1 4 it will be Pounds 67m and NWP will be Pounds 9.9bn.