annual report 2007 - the Admiral Group plc

10 CHIEF EXECUTIVE’S STATEMENT" The UK car insurancemarket cycle is turningwith sloth-like speed "In addition to a combined ratio morethan 20 points better than the marketaverage, we also grew the business. OurUK turnover increased by 14% (£708mto £808m) and the number of vehicleswe insure rose 13% (1.28m to 1.44m).Our conservative reserving philosophymeant we released £29.5m from prioryears into this year’s profit. We buildclaims reserves because history tells usthat this is an area that changes quitequickly. It has not been unusual tosee changes in the claims environmentresult in additional costs to all youropen claims, some of which are fouror more years old. So there is a methodto our madness, we reserve in case theworld changes and then release if it doesnot. From what I know at the moment,I do not see any reason to believe thatthis pattern will not continue.The biggest development in the marketin 2007 has been the rapid growth ofprice comparison websites as a leadingchannel of distribution in the industry.With the growth in the number ofprice comparison sites during the yearand with more sites planned to launchin 2008, I can only see this growthtrend accelerating.The important point of this change indistribution is that small insurers canget exposure to consumers equal tothat of big insurers. Previously smallerinsurers wouldn’t have the muscle toget equal exposure. The big insurers,who could spend a lot of moneyadvertising and/or be on lots of brokersites, could dominate the market by thevery fact that they were always visibleto consumers. Now small insurers,without spending a penny of marketingmoney, can get equal time. For carinsurance this is revolutionary stuff.This means that the market is pinnedto the lowest quote for any given risk.That is, a single firm could undercutthe entire market or, for any givenrisk, one firm could undercut the rest.Either way, this chain is going to moveonly as quickly as the slowest link.Typically the UK cycle is around sevenyears (1985 cyclical worst point, to 1991worst point, to 1998 worst point).On an earned basis it looks like 2007or 2008 will be the worst point inthis cycle, which is 9 or 10 years onfrom the previous worst point of 1998.Think sloths. And if the 2007 rate risesprove to be a false dawn, think slowmovingsloths!Changing Distribution:The Growth of PriceComparisonHowever, when one bemoans theeffect of price comparison sites on themarket keep in mind that the leader incar insurance price comparison is ourown Confused.com.Confused had it rather cosy for anumber of years, amassing a marketshare of some 65%. But we predictedback in March 2006 that this marketwould be a competition magnet andwe’ve only been surprised at howlong it took for the competition tomaterialise. But materialise it has!At last count there were more thanhalf a dozen price comparison sitesactively touting for business. Notsurprisingly, consumers have beenseduced by the ease in which they cannow get countless quotes. Overallad spend in the market, which hadbeen on the decline in 2006 beganto rise again in 2007 and continuesto rise, setting new records along theway. Price comparison sites accountedfor approximately 35% of the carinsurance tv and press spend in 2007.However, this figure grew throughoutthe year and in January 2008 it was