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Will motor insurance ever be profitable?

Tight squeeze – Private motor insurers have little room to extract profit in today’s market.

Who’d be a private motor insurer? Following record price increases in 2011, the market still only returned a 106% combined ratio that year and although specialists and low cost carriers might have delivered sub 100% returns, some major players still performed significantly above the market and lost their proverbial shirts.

Yet this is probably seen as a reasonably satisfactory performance, as many insurers slowly began to claw back horrendous losses. The fact remains that the market has not made money for close on 20 years; claims inflation is still rising and it remains well into double figures. So with insurers under severe political pressure from the Prime Minister and government to reduce prices, just how can they live up to their promises?

Tight squeeze – Private motor insurers have little room to extract profit in today’s market.

Tight squeeze – Private motor insurers have little room to extract profit in today’s market.

OK, there is some relief on the way with LASPO, pressure to ease the whiplash epidemic and the impending ban on referral fees; but this is still ‘jam tomorrow’.  More pressing for insurers is the need to balance the effects of the recent gender related legislative changes so as to retain their better performing female risks, while managing the challenge of being seen to be fair to a population of male drivers that has historically been far more costly.

The crunch will probably come in March when the bulk of business tends to be renewed but already surveys are seeing premiums for men falling significantly to allow carriers to cling on to their preferred female business. The impact on the bottom line of these changes will be interesting to observe.

And then there’s the thorny question of fraud. Now whilst it’s fair to say that the market is making progress and that recent investment in pre-quotation checks, greater sophistication at claims stage and better trained people is starting to bite, the significant costs attached will also have some impact on wafer thin margins. Fraudsters are becoming ever more sophisticated and it’s therefore of little surprise that counter-fraud teams are probably insurers’ largest growth area in terms of recruitment.

Add to the mix concerns about the potential impact of periodical payment orders that continues to vex both the primary and reinsurance markets and it becomes more and more evident that unless prices move up, private motor insurers are in for a rough ride over the coming months and years.

On the capital markets, investment returns for general insurers are still in the doldrums. Underwriters will understandably want to protect the bottom line and this will leave little room for manoeuvre in terms of price cuts. Indeed, the smoke signals emanating from the recent motor reinsurance renewal season suggests that reinsurance costs will rise by an average of 25% and it is very difficult to see how the market can swallow such chunky increases without passing them on.

In the past of course, there’s always been the possibility of falling back on prior years’ reserves. But even this option looks unlikely as the market has begun to strengthen so as to stiffen its resistance to an uncertain future.

This year will also see insurers having to contend with the rigours of the impending Consumer Insurance Act, requiring a more common-sense and less robust approach to disclosure, their question sets and the way claims are interpreted. Although any resulting costs have probably been factored in (given that insurers have been following Financial Ombudsman guidance for some years), the potential for a rise still exists.

The UK motor insurance market is amongst the world’s most dynamic and competitive. It is accordingly very difficult to see how the premium income to costs incurred equation can be made to balance and help deliver a profitable outcome.

As a result, most insurers find themselves between a rock and a hard place in 2013. On the one hand there is a real and continuing need to strengthen pricing but on the other, a political imperative to see premiums continuing to fall. With the Competition Commission review ongoing, there is clearly a lot to play for.

One thing seems pretty certain though. The market’s marathon losing streak is probably set to continue.

2 Comments on Will motor insurance ever be profitable?

  1. Ralph Savage // 22 May 2013 at 10:57 am // Reply

    This just in from Deloitte: 22nd May 2013

    UK motor insurers are struggling to make a profit on car insurance premiums, according to Deloitte, the business advisory firm.

    Figures presented at Deloitte’s 23rd Annual Motor Insurance Seminar show that total motor insurance premiums in 2012 were worth £13.1bn, about £200m lower than in 2011. Between 2009 and 2011 the total value of premiums rose by nearly £2bn taking the market from £11.4bn to £13.3bn.

    Insurers in 2012 posted a net combined ratio* of 105%, which means the combined cost of claims and expenses was £105 for every £100 of net earned premium. This is a slight improvement on 2011 when the net combined ratio was 106%.

    James Rakow, insurance partner at Deloitte, said:

    “2012 saw premiums fall by an estimated 1.5% at a market level and may well mark the top of the underwriting cycle. Based on a Deloitte survey, motor insurance premiums are likely to fall for the remainder of 2013, which consumers will welcome. In the past, once the market starts lowering premiums it has been difficult to reverse the trend.

    “During the period before the start of the financial crisis, insurers could rely on investment returns to make up the difference between premiums and outgoings. Now they will have to generate their profits from core underwriting or additional income from selling features to policies such as breakdown cover and legal assistance.”

    Legal changes enacted on 1 April 2013 will affect the UK personal injury claims landscape, reducing both the cost and frequency of bodily injury claims. In theory this should improve profitability for UK motor insurers. However, this is unlikely to happen in practice as the industry continues its price cutting and passes the benefit of the changes to policyholders.

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