Operating Review
UK Operating Review
Throughout the year we have maintained underwriting discipline and focused on operational excellence.
| £m | 2005 | 2004 |
|---|---|---|
| General business | ||
| Net written premiums | 2,632 | 2,555 |
| Underwriting result | 154 | 95 |
| Insurance result | 475 | 377 |
| Combined operating ratio (COR) | 93.1% | 96.3% |
2005 has been another very positive year for our UK business. Following the structural changes of recent years, we now have a platform in place to deliver sustainable profitable growth. Maintaining our focus on disciplined technical underwriting, underpinned by continuous operational improvement, we continue to demonstrate our ability to deliver sustained profitability.
Overview of major strategies
In Commercial, we have continued to consolidate our position and have concentrated our efforts on market segments where we can capitalise on our ability to win and retain profitable business. We are well placed to manage through the cycle based on our strong relationships in the marketplace and the flexibility derived from a diversified portfolio.
In Personal, we aim to realise further efficiency improvements and generate profitable growth. Our strategy is to maintain a competitive, profit led stance on rating and to focus on further operational improvements and cost efficiencies.
Our focus on reducing costs and driving efficiency in all areas of the business continues. We have started to implement a new IT infrastructure and have enhanced our customer service by process improvement and staff training. Development of our performance management culture throughout the UK has led to greater alignment between the performance of our people and the reward and recognition they receive.
We have continued to grow our market leading technical excellence in underwriting and claims, and brought greater alignment to how each of these core competencies serve our businesses. This revised focus allows us to evolve our customer segmentation, propositions and our ability to trade profitably through the market cycle.
TopBusiness progress against strategies
The UK business is the largest operating unit within the Group and has produced a strong set of results for the third year in succession, with an overall COR of 93.1% compared with 96.3% in 2004.
Over the last two years, we have reduced our headcount by 18% to 10,500. Our plan to move 1,200 roles offshore continues. We have transferred around 550 roles and expect to transfer the balance by the end of 2006. Customer service has been maintained whilst making these changes.
Online sales for our direct personal lines proposition, MORE TH>N®, now account for half of all the motor policies we sell, up from around 25% in 2004. Each month in the UK there are over seven million insurance related internet searches and we are taking action to ensure we are well positioned in this market.
We delivered the first phase of our major new IT platform in 2004 and throughout 2005 we continued to implement this across the business. Our claims system is now live in all of our major sites and our new policy administration system (AIS) is live in many of our Commercial offices. Completing the implementation of these systems fits our strategy for process and system rationalisation. This allows us to decommission 10 major legacy systems and accrue further significant cost savings.
Underwriting
We have made good progress in developing market leading capabilities in the pricing and selection of risks.
Within Commercial we have introduced underwriting filters to ensure the business we write properly reflects our strategically defined risk appetite. To augment this, we have introduced new training schemes for key underwriters to ensure adherence to technical pricing across the business.
In Personal we have implemented new rating methodologies across our direct and intermediated motor books. This sophistication has allowed us to confidently re-enter the brand broker market, worth £2.7bn gross written premium (GWP) and forecast to grow to £3.6bn GWP by 2008.
The initial release of AIS delivered improvements for servicing our motor fleet customers. In 2006 the system will be implemented across our business delivering an improved service through end to end processing. This provides a single view of the customer, improves consistency, minimises the administrative burden on underwriters and reduces the time taken to bring new products to market.
Throughout the year we spent considerable effort reviewing and revising our control environment. We have the operating procedures and systems in place to maintain our discipline on underwriting, risk accumulation and risk appetite.
Claims
Fundamental transformation of our claims capabilities, along with a clear focus on actively managing indemnity costs, has played a key role in driving our strong performance. The programme began in 2004 and is on schedule for completion during the second quarter of 2006.
We have focused on identifying the optimum method for managing each claim. Our new claims system is allowing us to restructure our claims handling team and deliver benefits including more effective management of customer claims.
We have led the market in leveraging our significant annual spend to develop active supply chain management solutions. First recognised by Lloyds TSB in 2004, this was further endorsed when Co-operative Insurance Society appointed us as their selected partner for the provision of a household contents and buildings supply chain.
Our claims capabilities provide an important point of differentiation in a competitive market. We deliver a high level of customer satisfaction through our rapid and helpful response to customer claims.
With 3.5 million small businesses in the UK, the small and medium enterprise market offers an ideal growth opportunity for the UK business. As the second largest player in this sector through our Enterprise brand, we are well placed to meet the insurance needs of these businesses through our direct and broker propositions. In 2006 we will introduce several new products through our direct offering, MORE TH>N® Business and there will be an increased emphasis on this route to market.
Commercial
Commercial's COR of 91.9% shows a 4.1 point improvement on 2004. The underwriting profit of £115m is up 60%. These results reflect both the quality of our Commercial portfolio and our continued focus on operational excellence. Among a strong set of performances, a number of segments stand out. We have a contract with Motability, who provide mobility solutions for disabled people. They have the largest fleet in Europe and customer numbers have increased this year. In addition customer numbers have increased in Risk Solutions and Marine. At the same time, retention improved by 3 points on 2004 to 85%, despite intense market competition. Property Investors and Marine have high retention rates reflecting the depth and strength of our relationships with customers and intermediary partners.
With a total market share of 10.1%, Commercial is the second largest insurer in the sector. We have a 12% share of the property segment, a 14% share in motor and 9% in liability. We insure 40%of FTSE 100 companies and are one of the leading carriers of Professional & Financial and Marine risks outside Lloyd's of London.
Commercial is the second largest player in the SME sector. Our direct commercial proposition is sold through the MORE TH>N® Business brand and aimed at the 3.5 million small businesses in the UK with a turnover of under £1m. It achieved impressive growth during 2005 with policy numbers more than doubling. We also offer our established Enterprise service through brokers and a bespoke service to corporate clients via the intermediated channel.
We have continued to anticipate and respond to the insurance needs of particular segments through understanding our customers. Marine was recognised by winning both the 'Underwriter of the Year' award at the British Insurance Awards, and the 'Risk Management' award at the Insurance Times Awards.
Well positioned to deliver sustainable profitable growth.
Personal lines
In the Personal business we achieved a COR of 95.6% in 2005 reflecting an improved performance from MORE TH>N® and the intermediated business. Household delivered an impressive COR of 90.4%, with motor achieving a COR of 102.9%.
MORE TH>N® recorded another strong performance with its COR improving to 92.4% and net written premiums up by 11% to £432m. We met our target of a sub 25% expense ratio by the end of 2005.
We continue to be a leading player in our chosen markets. We are the third largest motor and household insurer in the UK with 3.5 million covers in place and a 6.5% market share. Our multi channel distribution model, advanced call centre management expertise and proven ability to 'live' brands provides competitive advantage in this rapidly evolving sector.
During 2005 we have improved the functionality of the MORE TH>N® website and complemented this with targeted marketing to move customers towards using the internet. These changes, as well as a general trend towards internet usage, have resulted in growth of 109% via this channel compared to 2004. We now have around 15,000 visitors each day.
For our partners in the intermediated sector we introduced an integrated household policy system. This has been installed in a number of building societies, enabling them to offer insurance alongside their mortgage propositions.
We also introduced a number of new products into the intermediated market during 2005 including ClearChoice (home) and DriveSelect (motor). ClearChoice is our first home product to be delivered via our electronic business to business platform which helps us deliver value to our customers through competitive, factor based pricing and demonstrates our commitment to this channel.
We have increased our participation in seven leading panels, including AA, Kwik-Fit and Hastings. This was made possible by our improved pricing sophistication that will allow us to deliver competitive prices and acceptable returns from this sector.
The affinity channel, where we manage large groups of customers through a single source, has also been developed further underlining our proven ability to create solutions for our partners and enabling us to grow this side of our business. In 2005 we successfully negotiated deals including Yorkshire Building Society, where we added motor business to the household portfolio we already have with them. During the year we have renewed contracts including Toyota GB where we service their motor insurance account for a fee.
We have invested significantly in our wholly owned bodyshops. These sites undertake the entire range of motor repairs and in 2005 we opened a new state of the art facility in Birmingham. We have also launched a new motor product for the personal broker market and we provide motor insurance for a range of corporate customers such as Land Rover, Toyota GB and Volvo.
Market and economic conditions
The market has remained competitive in 2005, with downward pressure on rates in a number of classes. Our rating experience was mixed across the portfolio particularly in Commercial. As a leading insurer we are committed to maintaining pricing discipline.
In 2006 we will continue to target new business where we can obtain attractive pricing terms and focus on retaining business.
Understanding our customers, delivering excellent service and building strong relationships in our chosen markets, combined with our market leading technical excellence in underwriting and claims, enables us to continue to manage the cycle effectively. It will see us deliver sustainable, profitable growth while maintaining our underwriting discipline.
The personal lines market is extremely competitive, particularly in motor. This underlines the importance of our ongoing strategy of driving down operating expenses. The good results being achieved by Personal demonstrate how far we have already come in developing our ability to trade profitably through the insurance cycle.
Outlook
The UK business delivered good results. Our key focus for 2006 will be maintaining our strong performance, while continuing our pursuit of operational excellence, ensuring underwriting discipline and targeting sustainable, profitable growth wherever it can be identified.
The completion of our new IT platforms for servicing policies and claims will enable us to enhance our operational effectiveness and improve our customer service and competitive pricing.
The web offers strong prospects for profitable growth. We will continue building on the strong foundations established through the MORE TH>N® brand. In particular, we believe a very significant opportunity exists to shape and lead the SME commercial market. We will therefore be accelerating the growth of MORE TH>N® Business and intend to introduce several new products in 2006 to establish a commanding presence in this rapidly developing segment.
Following the completion of our claims transformation programme during 2006, we will continue to pursue further claims initiatives, including the expansion of our supply chain operation. These, along with a range of initiatives aimed at reducing our operating expense base, will support our ability to generate attractive returns in what remains a challenging marketplace.
We will continue to enhance the sophistication of our motor and home underwriting to enable us to tailor our rating tables to specific segments of business and types of customers.
We have continued to demonstrate our ability to deliver strong financial returns and the service our customers demand. We believe the proven success of this approach over the past three years is indicative of our ability to deliver sustainable profitable growth.
