Motor insurance reaches peak performance in 2012 but still fails to break even
2 April 2013
Early analysis of the 2012 annual results released from two-thirds of the UK motor insurance industry suggests that the market will return its best result in five years. However despite the Net Combined Ratio (NCR) improving by almost 20 percentage points, the NCR is set to hit around 102% and is unlikely to fall below 100%, meaning the market as a whole will still not make an underwriting profit on motor insurance. The results also show that many companies have or will be introducing price reductions during 2012 and 2013, meaning that profitability has already peaked.
Catherine Barton, Partner in EY’s Financial Services Practice, commented: “These early results show that the market has turned too soon, well before many players have managed to break even. To buck this trend, less profitable insurers should be looking to maintain underwriting discipline in order to improve their performance – but this does not seem to be supported by the pricing actions we are seeing in the market.”
Is history repeating itself?
Between 1998 and 2001, the NCR recovered from 124% to 104% following significant rate hikes. A decade later, between 2010 and 2012 underwriting profits have recovered in a similarly dramatic fashion, with the NCR rising from 120% to 102.5%.
After 2001, a period of apparent calm followed in the reported market results with insurers reporting approximately 102% NCR from 2002 to 2007. In reality, however, reserve releases were supporting results while underwriting competition and severe claims trends dragged underlying performance down.
In 2013, claim trends are a big unknown due to the extensive regulatory change which will impact industry from April this year. Competition remains rife, and insurers are already introducing price reductions. But insurers are unlikely to have such substantial reserve margins this time – which means that the market will need to face up to the reality of performance deterioration more quickly.
Catherine comments: “There is a clear pattern emerging between the results of the last three years and the shape of the market a decade ago. The preliminary results this year confirm that once again the market has softened before most players have become profitable outside of ancillary income. This time however we believe that insurers will need to face up to the reality of performance deterioration more quickly, as the pressures being put on ancillary income by regulation and the Competition Commission will force insurers to address the shortfall in profits more quickly.”
Regulation will make or break the current model
In 2013, insurers arguably need to deal with two of the biggest regulatory changes ever to have affected the market: one affecting the ability to set prices; the other affecting their approach to settling claims.
With the removal of gender as a rating factor from December 2012, pricing uncertainty has been heightened from the start of the year. The ECJ Gender Directive was expected to increase rates for young female drivers and generate a period of volatility, but initial signs are that insurers have not increased prices for young women as much as expected, which leads to concern around their overall rating strength.
From April 2013, the reforms in the claims environment under the LAPSO Act will result in changes that are intended to reduce the costs associated with personal injury claims. The reductions are intended to offset the increase in awards to claimants, and therefore should be a benefit to the insurer and claimants.
Catherine says: "The fact that insurers have not increased rates when they removed gender from their pricing models is a clear indication of how competitive the market is on price. The impact of LAPSO on claims costs is unknown –but we think it will be neutral at best. Reductions in market prices may mean that insurers have chosen to see these reforms through rose-tinted glasses and are hoping the effect will be positive.
“Even in the unlikely event that both these changes do spell good news, insurers are taking credit too early, which leaves the potential for things to go wrong. If insurers are caught out, the only remedy will be subsequent price increases, which will come at a time when consumers can ill-afford major increases in insurance prices.”