Operating Review
Scandinavian Operating Review
We are committed to delivering on our objectives by continuously improving our claims handling and underwriting capabilities.
| £m | 2005 | 2004 |
|---|---|---|
| General business | ||
| Net written premiums | 1,324 | 1,228 |
| Underwriting result | 65 | 54 |
| Insurance result | 180 | 145 |
| Combined operating ratio (COR) | 94.4% | 95.6% |
In 2005, we continued to focus on our core disciplines and produced very good results with a combined operating ratio of 94.4% and a £65m underwriting profit.
Overview of major strategies
We are the third largest general insurer in the Nordic region comprising Denmark, Sweden, Norway, Latvia and Lithuania. In line with the rest of the Group, our strategy is to focus on markets where we hold positions that enable us to see the positive benefits of the underwriting and pricing actions that we have taken. In both Denmark and Sweden we are the third largest insurer. These businesses are supported by our growing operations in Latvia and Lithuania (Baltics) where we hold market leading positions.
The operational performance improvement programme introduced in 2003 has now moved to business as usual with the commitment of delivering on our targets by continuously improving our claims handling and underwriting capabilities as well as constantly monitoring and updating our product offering.
We have continued to develop our customer value propositions in personal and developed new propositions for commercial lines. We are building our distribution proposition. In Denmark we have 68 bancassurance agreements with the local banking market including the fifth largest Danish bank SparNord and in Sweden we have recently started selling policies through our partner FöreningsSparbanken (Swedbank).
We now have agreements with three major motor manufacturers which between them account for a quarter of car sales in Sweden and almost 10% in Denmark.
Focusing on the motor sector in Denmark we have jointly developed a vehicle inspection and insurance cover product. The product provides six months of cover for major mechanical components.
Pursuing opportunities for acquisition based growth, led to the acquisition of TopDanmark's marine portfolio which consolidates our number one position in Danish marine.
During the year, we took the next step in driving forward the pan Nordic organisational initiative by realigning our organisation along business lines rather than by geographical regions. The new organisation consists of a number of divisions; Commercial, Personal, Key Accounts, Marine and the Baltics. These business divisions will be serviced by a number of pan Nordic support functions. We will continue to evaluate opportunities for enhancing scale and efficiency in the forthcoming years.
Our employees are key to our success. We are well on our way to moving towards a true performance culture, implementing a performance orientated bonus system for all employees, which is integral to embedding the new culture. We are establishing a more open and challenging culture, which is fairer and offers better promotion prospects with clear and open structures. We believe that this new culture makes us better placed to get the right people for the right jobs. We now have more effective tools to measure leadership performance, thus making it possible for everyone to see their strengths and areas for development. This culture will help us to develop our business.
We are committed to driving the pan Nordic organisation forward but recognise that each country is different and our customer propositions, customer segmentation, pricing models and brands are adapted for each market. As a result, we remain committed to our multibrand strategy in our primary markets where we trade under a variety of brand names: Codan; Trekroner and Privatsikring in Denmark and Trygg-Hansa; Aktsam and Tre Kronor in Sweden. Our main brand names, Codan and Trygg-Hansa, have close to 100% prompted brand awareness.
We are building on our distribution capabilities. In Denmark we have a successful bancassurance proposition and are applying our skills and knowledge in Sweden, where bancassurance distribution has yet to develop. Through our partner in Sweden, FöreningsSparbanken (Swedbank), we have access to a potential four million customers.
TopBusiness progress against strategies
In Scandinavia, net written premiums of £1,324m were up 8% on 2004 and the underwriting result improved by 20% to £65m. The COR of 94.4% improved by 1.2 points on 2004.
We are focused on the markets and segments where we can see the benefit of our underwriting and pricing actions.
The claims ratio was 74.4%, 2.1 points better than prior year while the expense ratio reflected an increased sales focus and a general strengthening of support functions, including a number of additional regulatory costs. The improvement in our claims ratio reflects the result of the performance improvement programme focusing on more sophisticated pricing models, expansion of rate plans into the part of the commercial book that was previously manually underwritten, as well as continued management action to improve our claims handling and sales efficiencies.
Our Commercial business, with a COR of 85.5%, performed strongly reflecting the benefits of a review of the entire portfolio and increasing premium rates to levels that properly reflect the risk in recent years. In Personal lines, the COR of 102.5% and the Swedish Personal COR of 104.7% reflects the decision to strengthen personal accident reserves. In Denmark the COR for Personal lines was 99.5%.
A number of factors influenced our 8% growth in net written premiums, including improvements in the way in which we structure our reinsurance covers. We achieved rate increases ahead of the market in Swedish Personal Accident, while rate increases across the rest of the portfolio were in line with the market.
We have continued to enhance our concept of dynamic pricing, where prices are based on market factors, price elasticities and technical price. We have also expanded our rate plan based pricing to the part of our commercial book which was previously manually underwritten.
Our customer value propositions have been refined for the Personal market with enhanced value propositions for targeted customer groups, notably families and the over 50s. In Commercial we have introduced customer value propositions aimed at being the best in the market for advisory services. We facilitate Commercial clients' risk management activities with counselling programmes, product offerings, claims adjustment programmes and claims prevention programmes.
In 2005, customer surveys in Denmark and Sweden showed high levels of customer satisfaction. In both Denmark and Sweden, we recorded a net positive inflow of Personal customers in 2005. We believe that the work to improve our value propositions is a major contributor to this increased number of customers.
We will continue to develop and improve our distribution channels in Scandinavia, where most insurance is written direct through call centres and tied agents for both Personal and Commercial insurance. Unlike the position in many other countries, only a limited proportion of the commercial book is written through brokers.
The markets of Latvia and Lithuania have exciting growth prospects following entry into the European Union in May 2004. In these markets we have gained market share consolidating our number one position. We continue to drive growth and reduce operating costs. Net written premiums are up 26% to £87m and the combined operating ratio was 90.3%. We will maintain our focus on growth within these markets as well as continue to develop the infrastructure by utilising best practice from the other Group operations.
Market and economic conditions
The Scandinavian markets are highly consolidated. In Sweden, the top five players represent 90% of the market and in Denmark 70% of the market. We do not expect significant changes to this level of consolidation, although we did see a limited number of new players enter our markets in 2005, particularly multi nationals in Commercial lines.
In 2005, profitability in Scandinavian markets was good, following the hardening of premium rates in previous years. In Commercial lines, rate levels have increased following several years of low underwriting results. Rates in the Commercial market are under pressure in particular within the Industrial and Transportation segments.
During 2005 we responded proactively to pressure from consumer organisations to offer policies which run for less than one year. We offered products with these characteristics although we have experienced limited demand at this stage.
Interest rates in the Scandinavian market remained at low levels and were, against expectations, lower than those at the end of 2004. These low interest rate levels have led to low investment returns and underlined the need for sustainable profitable underwriting results within the industry.
Outlook
We remain committed to improving our core capabilities; pricing, underwriting and claims handling. We believe focusing on our core capabilities will help to mitigate the effect of any softening of the rating environment and maintain our profitability. In addition, we will be looking for further profitable growth opportunities.
In summary, we will maintain our focus on the markets and business lines where we have scale and see evidence of sustainable profitable growth. With the changes we have made in our performance culture and organisational structure, our team is well positioned to deliver on these opportunities.
