UK Household Insurance: Market Dynamics and Opportunities 2017

Table of Contents

EXECUTIVE SUMMARY 1

1.1. Market summary 1

1.2. Key findings 1

1.3. Critical success factors 1

2. MARKET CONTEXT 7

2.1. Introduction 7

2.2. Soft market conditions shaped 2016 7

2.2.1. UK household insurance GWP fell by

1.4% in 2016 7

2.2.2. High competition has kept rates low in the main product category 8

2.2.3. The requirement to notify customers of the previous year’s premium is expected to encourage shopping around 12

2.2.4. Combined cover is still the dominant product 12

2.3. Profitability is being challenged by claims and inflation 13

2.3.1. Claims costs fell in 2016 but average claims costs are increasing in areas 13

2.3.2. Claims inflation is challenging profitability 16

2.3.3. Underwriting profitability increased to a five-year high 18

2.3.4. Flood Re affected results in 2016 19

2.4. Home insurance demand remained constant, but underlying dynamics are shifting 20

2.4.1. New home registrations and completions contracted slightly in 2016, although numbers remain well below requirements 20

2.4.2. Mortgage approval rates in 2016 remained level with 2015, but have fallen in 2017 22

2.4.3. The rise of ‘Generation Rent’ presents a shifting landscape 23

2.4.4. Penetration rates are high among owner-occupiers, but lower for tenants 24

3. COMPETITOR DYNAMICS 26

3.1. The top 10 insurers account for 72% of GWP 26

3.1.1. Direct Line Group leads the household insurance market 26

3.1.2. Lloyds Banking Group is losing ground due to soft market conditions 27

3.1.3. Aviva is evolving its proposition using technology 27

3.1.4. Ageas is looking beyond the traditional policy to target millennials 28

3.1.5. Allianz and LV= link up 28

3.2. Technology is facilitating new entrants 29

3.2.1. Neos aims to bring home insurance into the digital world 29

3.2.2. UK insurers are watching US digital insurer Lemonade 29

3.2.3. Insure-A-Thing is challenging the traditional business model 30

4. 2017 AND BEYOND 31

4.1. Introduction 31

4.2. The market is expected to grow to £6.8bn in GWP by 2021 31

4.2.1. Premium rates are unlikely to increase in the short term 31

4.2.2. Demand for home insurance will stay static as Generation Rent grows 31

4.2.3. A significant weather event will be required to shift rates 32

4.2.4. The negative economic consequences of Brexit are having an adverse effect 32

4.3. Generation Rent will drive a new set of products 34

4.3.1. Demand for propositions aimed at tenants is growing 34

4.3.2. Millennials have different priorities and lifestyles compared to previous generations 35

4.3.3. Gadget insurance is being heavily marketed towards students and millennials 35

4.3.4. ‘Back Me Up’ offers cover for any three items 36

4.3.5. Trov offers a digital locker 36

4.4. The evolution towards smart home insurance has started 37

4.4.1. Water detection is the primary focus to reduce escape of water claims 37

4.4.2. Security is another risk which is getting attention from insurers and tech companies 37

4.4.3. Other devices are driving a more connected home 37

4.5. Competition from new startups and retailers is growing 39

4.5.1. New startups like Neos will continue to disrupt the market 39

4.5.2. The battle to own the customer has started 39

4.6. There are barriers and risks to overcome before we get to smart home insurance 40

4.6.1. Customers are expecting cheaper policies 40

4.6.2. Insurers are looking at the implications of the General Data Protection Regulation 41

4.6.3. Cyber risk for individuals is growing 42

5. APPENDIX 43

5.1. Abbreviations and acronyms 43

5.2. Methodology 43

5.2.1. GlobalData Financial's 2016 and 2017 UK General Insurance Consumer Surveys 43

5.3. Bibliography 44

5.4. Further reading 45

List of Tables

Table 1: Household insurance GWP (£m) and annual growth rate (%), 2012-16 8

Table 2: Quarterly average household insurance premium rate movements, 2012-17 10

Table 3: AA Shoparound average home insurance premiums, Q1 2015-Q1 2017 11

Table 4: Household gross claims incurred (£m) by type, and number of claims notified, 2012-16 16

Table 5: New home registrations and completions, 2012-16 21

Table 6: Percentage of respondents holding any form of home insurance, 2015-16 25

Table 7: Top 10 UK household insurers by GWP (£000s), 2016 26

Table 8: UK household insurance GWP and growth rate, 2012-21f 34

Table 9: Percentage of respondents, by type of smart device in their home 38

Table 10: Percentage of respondents who would buy home insurance by brand/type of company 40

List of Figures

Figure 1: Household insurance GWP continues to fall 8

Figure 2: Average premiums have reduced in the last two quarters 9

Figure 3: Insurers have struggled to increase rates in the past year 11

Figure 4: Combined insurance remains the dominant home insurance product 13

Figure 5: Weather-related claims costs are at their lowest since 2013 14

Figure 6: The last five years have seen a significant drop in the number of claims 15

Figure 7: Rebuild costs have been rising since September 2016 17

Figure 8: The cost of replacing household items has accelerated since 2015 18

Figure 9: Underwriting profitability grew to its highest level since 2011 19

Figure 10: New home registration and completions remained constant in 2016 21

Figure 11: Monthly mortgage approvals have declined in 2017 22

Figure 12: Private tenant is the fasting growing type of tenure 23

Figure 13: Nearly 40% of private tenants do not have any home insurance 24

Figure 14: The household market will show modest growth over the next five years 33