Insurance & Investment
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Risks and Uncertainties
The risks and uncertainties we face in pursuing our strategy include competitive pressures, regulatory change and the performance of the investment markets. Greater competition in the markets in which we operate is being driven by market consolidation, technological development and consumer demand. Our scale, powerful distribution and efficiency all provide us with a critical competitive advantage and ensure we are well placed to succeed in this environment.
Changes in regulation and legislation are an ongoing feature of the insurance and investment industries. We have responded positively to changes in recent years (e.g. Pensions ‘A-Day’) and will continue to take opportunities to turn regulatory change to our competitive advantage, where possible. The most immediate and significant regulatory issue facing our business at present is the potential Competition Commission investigation of the repayment insurance market which may, ultimately, impact profitability across the industry. However, as a manufacturer and distributor of the products we are well placed to deal with any resultant changes. We are continually reviewing and enhancing our processes and our proposition to ensure that our Repayment Insurance products remain a valued product for our customers.
The performance of the investment markets (equities, property and gilts) has a direct impact on our financial position and performance and can affect investor confidence. We seek to mitigate this risk through diversification of our portfolio. Further, our multi-channel operating model enhances our opportunities for growth even in difficult market conditions. Importantly, our Bancassurance channel is less affected by market performance than other channels, as evidenced by strong growth during the bear markets at the start of the decade.
In General Insurance, adverse weather conditions, particularly flooding and storms, could lead to a significant rise in Household Insurance claims costs and hence reduced profitability. Similarly a significant adverse change in economic conditions could lead to increased claims for our Repayment Insurance business. A comprehensive reinsurance programme is in place to limit our potential exposure to major weather events whilst robust underwriting and risk based pricing remains a key part of our business model.
Prospects
Our objective for Insurance & Investment remains unchanged, namely to be the UK’s leading insurance and investment group. Our long term ambition is to grow market share in all the sectors in which we operate but in doing so our emphasis will continue to be on profitable growth. Our strategy is based on the core strengths of our existing multi-channel, multi-brand operating model, leveraging the strength of the Group’s brands and customer base, but also further extending our presence in 3rd party channels.
In General Insurance, whilst short term sales growth has been tempered by slower unsecured lending growth and competitive conditions in the motor market, we believe that the medium term prospects for our combined personal lines businesses continue to be strong subject to some regulatory uncertainty until the Competition Commission enquiry reports. In particular, in 2007 we will leverage our market leading position in Mortgages to target further growth in Household Insurance, through the development of our product propositions and brand offerings, and we will utilise the strength of the esure and Sheilas’ Wheels brands to grow our Motor Insurance business when the pricing cycle turns.
In Investment, demographic trends and increasing wealth point to significant long term growth potential. Our multi-brand, multi-channel operating model continues to deliver strong net growth and represents a clear source of competitive advantage. This will remain at the core of our strategy as we continue to grow market share on profitable terms and consolidate our position as the number one investment business in the UK.
