1. UK Insurance Sector Landscape

Insurance is an instrument that hedges risk and provides social security, and it can be broadly classified under life insurance and non-life insurance. The United Kingdom is regarded as the birthplace of modern insurance since privately owned and technically advanced insurance companies first emerged in Britain. Presently, the UK Insurance is fundamentally changing since macroeconomic, regulatory, and social trends continue to impact life and general insurers.

It is mindful to note that the United Kingdom is the largest non-life insurance market in Europe. Meanwhile, according to the report from Research and Markets, the market size for the global insurance industry is projected to grow at a CAGR of 6% between 2020 to 2023 and reach US$6,840.70 billion in 2023 from the market size of US$5,807.30 billion in 2020. The industry has slowed down in 2020 as compared to 2019 due to the economic slowdown, led by Covid-19 pandemic.

The insurance sector is one of the biggest growth contributors to the GDP and provides significant employment. The insurance products include life insurance, health insurance, motor insurance, property insurance and accident insurance. The insurance policies are sold through different distribution channels such as direct underwriting, brokers, agents and bancassurance. The insurance companies receive a premium from the sale of insurance products to the customers, and the premium received from the customers is invested in high-quality assets that generate returns to pay for the claim.

As per the Statista data, the UK’s life insurance and non-life insurance gross written premium (GWP) is expected to be close to £186.8 billion and £80.1 billion, respectively in 2020. Both the life insurance and non-life insurance gross written premium is expected to grow at a CAGR of around 3.6 percent between 2018 and 2023. As per the Swiss Re report, the total premium in the UK stood at close to USD 366.2 billion in 2019, and it held the fourth position among the global insurance leaders.

As per the Mordor Intelligence report, the motor insurance market in the UK is expected to grow at a CAGR of around 4.0 percent between 2020 and 2025. The home insurance market would likely grow at a CAGR of around 1.5 percent between 2019 and 2025 to £5.0 billion.

Insurance Sector Pricing Structure and Components

The insurance market is highly competitive, and the online price comparison websites have given consumers the liberty to compare the prices and the features of the policy that best meet their requirement and mitigates the risks. The insurance policies have a dynamic pricing structure as the consumers have become more informed and the transparency of the products have increased. The predictive analysis, big data and complex models are helping to have pricing that assesses the clients’ risk and more accurately gives the price. The insurance sector can be broadly classified under life insurance and non-life insurance segments. It can be further segregated under the below category.

Key Trends

• Environmental, Social and Governance (ESG) insurance solutions: ESG factors that are impacting the underwriting include environmental issues, climate change, resource depletion, local communities and corporate governance. That means that transactions related to ESG factors should be assessed before underwriting. Prudential Regulation Authority (PRA) in the UK requires quantification of the ESG impact on the insurance companies, and it is required to be reported under Solvency II stress-testing exercises. The renewable energy investment, infrastructure development, climate change-related issues would be a key area for sustainable action where multiple ESG insurance policies exist.

• Online Distribution Channels: Insurance sector needs a multi-channel strategy to distribute products to diversified audiences and regions. The clients and agents use an online platform to access, monitor and transact the products. The digital distribution channels help to understand client’s needs and long-term plans, which helps in designing better products. They also provide efficient and scalable platforms that are flexible to the local market needs with uninterrupted service to the customers.

• Evolution of Claims: Automatic claim process will be much leaner, faster with a lot of transparency for processing claims. For example, in the automobile insurance sector, most of the vehicles would have automatic sensors that would enable the insurance companies to get all the information automatically related to the damage and it would reduce the need to ask in-person questions. The claims would be processed quickly, and it would be working based on the internet of things (IoT).

• Strategic Alliance and Partnership: The Insurance market remains highly competitive, and the key for growth is to partner with other brands for the sale of products. The insurance companies collaborate with banks, digital payment platforms for commercialization of products.

• Technology to Streamline the Underwriting Process: The conventional underwriting process was very labour intensive with lots of functions and disparate systems that require an enormous amount of effort to assess a large amount of data. Distribution networks require that underwriters respond quickly and often that needs integration between human and digital solutions. Intelligent tools help underwriters in smart processes, automating tasks and taking decisions using cognitive robotics, analytics and artificial intelligence. Cognitive robotics can sort the basic service requests, and self-adjusting win probabilities can help the underwriter which submissions to work on to improve hit ratios. Anomaly detection can help in identifying a significant change in the renewal application that requires underwriters attention. 

• Robo-advisors: The insurance sector companies were previously focused on paper-based communication with clients or face to face advice. Robo-advisors are automated systems that cover full insurance value-chain with minimum human intervention. The intelligence of robo advisors assess the needs and risk of the customer and helps in sales, commission, claims process and billing of insurance policies.

• Cyber Insurance: It is a domain that is attracting limelight, and it is among the top global risks as the cyberattack has become very frequent. Cybersecurity and data privacy is of great importance, and any threat to it could impact business continuity. Companies are buying cyber insurance to mitigate the impact of cyber-related threats. As per the Swiss Re report, the global cyber insurance market is expected to grow at a CAGR of ~26 percent between 2018 and 2025 to USD 18 billion.

Growth Catalysts

• Nearly two billion people are expected to be aged over 60 by 2050, which would support a huge demand for retirement solutions.
• The number of middle-class populations will grow to ~1.2 billion in 2030 from 430 million in 2000, which shall create more wealth to demand for insurance solutions.
• The increasing drug-resistant diseases (e.g. Covid-19 mayhem) are likely to heighten risk and liabilities.
• The global rise in the population could create a health crisis, and thus, the higher rates of insurance premium.
• Moreover, the slowing growth in developed markets, rising sovereign debt concerns, and instability of capital markets shall boost the demand for insurance products.
• Employee benefits packages are generally used by companies to purchase group insurance for their employees that include life insurance, health insurance and income protection.
• Collaboration with digital partners and use of artificial intelligence to offer a wide range of consumer services such as risk factor identification, telemedicine and digital payments.

Risk Exposure of the Insurance Sector

• Financial Risk: A proper product repricing, reinsurance and liquidity is required, and any miss on that could be a significant challenge. If the adequate hedging strategy is not applied, there is a considerable downside risk.
• Regulatory Risk: Insurance sector is highly susceptible to change in the government’s policy, legislation and capital requirement. Any lack of meeting the regulatory requirement can result in the additional cost and penalty.
• Decline in Asset Value: The negative mark to market movement on the hedging instruments or low return from the investments to meet the claim payments can harshly impact the value of the assets.
• Higher Mortality Rate: If a higher number of policyholders die early, it would increase the claim payments and affect profitability.
• Increasing Claims: If the numbers of claims increase, it could impact the profitability of the insurance companies.

SWOT Analysis 

Index Performance

The life insurance sector has shown resilience during the Covid-19 crisis, and thus, FTSE All-Share Life Insurance index (with ~13.66% return) and FTSE All-Share Nonlife Insurance (with ~10.54% return) have outperformed the FTSE All-Share (with ~9.04%) and FTSE 100 indices (with ~6.50%), over the past six months.

Fig 5: Index Performance Comparison

(Source: Refinitiv, chart created by Kalkine Group)

Regulatory Requirements

The insurance sector in the UK is regulated by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). PRA is a part of the Bank of England, and it nurtures an operating environment of both the insurers and policyholders. FCA monitors how insurance companies operate and maintain the integrity of the financial markets. Solvency II is the requirement for the insurance and reinsurance companies that is related to the valuation of assets liabilities and capital requirement, governance & risk management and reporting disclosures.

Insurance Sector Outlook

The UK insurance sector is the largest in Europe, and the sector forms a vital part of the wider financial services cluster in the UK. As per the Allianz Global Insurance Report, the global gross premium grew by ~4.4% in 2019 against 2018 to EUR 3.906 trillion, driven by the economic recovery in the United States and China. In 2019, the global life insurance sector outperformed the global property and casualty market.

However, the Covid-19 pandemic has led to the shrinkage of global premium (projected to decline by 3.8% in 2020 as against 2019). The economic impact of Covid-19 would continue to impact the insurance market in Q3 and Q4 of 2020. Moreover, lower interest rates and equity returns will keep the industry’s ROE and ROI on the lower side. Also, the decrease in global GDP could impact the premium growth. At the same time, increasing global infection and death rates could lead to an increase in claims as well.

Adjacently, the Brexit concerns may impact the UK’s economic recovery from the Covid-19 slump. There is a climate risk to Property & Casualty insurance as assets are vulnerable to natural catastrophes and events. Notwithstanding, the long-term fundamentals of the industry remain intact to support the growth, though the short-term uncertainties cannot be ruled out.

According to the report from the Markets and Markets, the market size for the global insurance analytics market is expected to reach ~US$11.96 billion by 2023 from US$6.06 billion in 2017, representing a CAGR of ~12.5% during the forecast period. The rapid adoption of data-driven decision making, increasing adoption of digital insurance shall support the market growth.

Meanwhile, the UK insurance brokerage market is expected to top $19.9 billion in market size by 2024, which is supported by the rise of the small and medium enterprises, increasing opportunities for healthcare and accidental insurance market. Similarly, Insurtech adoption had grown substantially to 50% in 2019 from 8% in 2015. The use of technology can make the products more profitable, affordable, and can provide access to new risks pools. It is expected that digital solutions will drive operational efficiency by filtering down the insurance supply chain in future.

Furthermore, the UK motor insurance is likely to return to profit in 2020 as lockdown resultant into lesser insurance claims. The sector is facing significant headwinds due to underlying inflation and reduced interest rates. According to EY, the net combined ratio for the UK motor insurance market is expected to be 94.8% for 2020.

In 2020, the pandemic would weigh down on the insurance sector, but over the long term, the premium would continue to rise globally, mainly supported by the demand for the non-life insurance segment. The economic growth, changing demographics, technological advancement and increasing awareness about risk would be the key factors that would propel the growth. A key area to watch out would be the investment performance of the insurance companies as the financial environment remains challenging with lower interest rates and volatile markets. We believe that from a long term standpoint, the insurance sector outlook looks promising and may offer decent growth opportunities for the investors.

2. Investment Theme and Stocks Under Discussion (AV, RSA, SBRE and LRE)

After gaining insights on the insurance sector dynamics, we would look at the business model of four insurance players listed on the London Stock Exchange.

Aviva PLC (LON: AV)

(Recommendation: Buy, Potential Upside: Lower Double Digit, Mcap: GBP 11.44 billion)

Aviva PLC is a UK based Company, which is engaged in saving, retirement and insurance business. In 2019, it had around 33.4 million customers and paid out benefits and claims of £33.2 billion. The business portfolio of Aviva includes UK life, General insurance, Europe life and Asia life.

(Source: Refinitiv, chart created by Kalkine Group)

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~22 percent over the closing price of GBX 298.80 (as on 6 October 2020).

RSA Insurance Group PLC (LON: RSA)

(Recommendation: Buy, Potential Upside: Lower Double Digit, Mcap: GBP 4.72 billion)

RSA Insurance Group PLC is a FTSE-100 listed Company. It underwrites personal and commercial insurance that includes life insurance, motor insurance, home insurance and pet insurance. It caters to over 9 million customers in more than 100 countries.

(Source: Refinitiv, chart created by Kalkine Group)

(Source: Refinitiv, chart created by Kalkine Group) 

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~20% over the closing price of GBX 461.00 (as on 6 October 2020).

Sabre Insurance Group PLC (LON: SBRE)

(Recommendation: Speculative Buy, Potential Upside: Lower Double Digit, Mcap: GBP 643.75 million)

Sabre Insurance Group PLC is a UK based motor insurer that offers diversified products through different distribution channels. The Company owns brands, such as Insure 2 Drive and GO Girl.

(Source: Refinitiv, chart created by Kalkine Group)

(Source: Refinitiv, chart created by Kalkine Group) 

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~24 percent over the closing price of GBX 255.50 (as on 6 October 2020).

Lancashire Holdings Ltd (LON: LRE)

(Recommendation: Avoid, Potential Downside: Lower Double Digit, Mcap: GBP 1.68 billion)

Lancashire Holdings PLC is a Bermuda based global speciality property & casualty reinsurer. The Company has three platforms that include Lancashire Insurance companies, Lancashire Syndicates Limited and Lancashire Capital Management.

 (Source: Refinitiv, chart created by Kalkine Group)

(Source: Refinitiv, chart created by Kalkine Group) 

Valuation Methodology

Our illustrative valuation model suggests that the stock has the potential downside of ~24 percent over the closing price of GBX 688 on 6 October 2020. 

*All forecasted Industry or Peers information have been taken from Refinitiv, Thomson Reuters.

*The “Buy” or “Speculative Buy” recommendation is also valid for the current price as covered in the report as on 7 October 2020.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.

Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.