Best motor insurance results since 2006 but premiums may have to go up if legislative changes don’t deliver

21 April 2014

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  • Referral fees ban on small claims may be far from watertight
  • Premiums are falling and the add-ons market is under scrutiny
  • But medical panels should be a positive step in halting ‘compensation culture’

2013 year end results for the motor insurance industry are better than expected, largely as a result of an increase in reserve releases, reports EY. Analysis of the results of the majority of listed insurers indicates that the net combined ratio (NCR) will be around 101%, a 2.5% improvement on last year and the strongest underwriting performance since 2006. However, the strong results are heavily dependent on the referral fees ban delivering as intended. As there are already signs that this may not be the case, there are fears that insurers could face late submission of claims for the next three years.

Catherine Barton, Head of Retail Property & Casualty Actuarial, EMEIA at EY, comments: “While referral fees themselves are banned, it looks like there are still ways in which customers can be encouraged to make claims, and that those encouraging them can receive payment in a form other than a referral fee. Genuine claimants do of course need to be compensated, but the continued presence of manufactured claims in the market drives extra costs into the system, as well as increasing the number of claimants, which has a knock-on impact on premiums.”  

Motor insurance underwriting has been loss-making (i.e. with an NCR of over 100%) for the last 20 years. In 2013 increasing levels of competition put pressure on premiums, which fell by 8.8%, affecting profitability, which has been under pressure from the increase in small claims over the last decade. Although the referral fees ban was intended to reduce the volume of these claims, it may not been as effective as desired.

Catherine says: “This is a real concern because of the drain it has on the industry and the knock-on impact on policy holders. The motor insurance industry sees many late reported claims for small injuries that appear a long time after the accident, which raises questions about whether they’re genuine and should be compensated. The weight of these claims on the industry inevitably leads to higher premiums.”

A medical panel for motor insurers should reduce claims payouts

The introduction of a medical panel in the next few months for small claims in the motor industry should help insurers to better understand the high volume of complex injury claims.

Catherine comments: “Having a medical panel could be a huge benefit. Insurers often find it incredibly difficult to navigate the many injury claims they receive, particularly those involving soft-tissue damage, which are notoriously hard to determine, especially if claims come in late in the day. The panel should add clarity to the insurance process, which would ensure that the money customers are paying in premiums is more directly fed back to successful claims.”

Add-ons market shake-up will also put pressure on premiums

The FCA's proposed shake-up of the £1bn general insurance add-on markets is likely to lead to reduced take-up of these products as customers move away from believing they should buy products that have been pre-selected for them.

Catherine says: "To a certain extent add-on products have supported insurers writing core products at lower prices for some time, so in many cases customers should expect to experience price rises on their core motor or home insurance products."

Gloomy outlook for household insurers adds to pressure

Household insurance has traditionally produced more reliable profits than the motor industry and helped to smooth profitability for general insurers. But the inclement weather and resultant floods which struck at the end of 2013 and in the first quarter of this year will have had an impact on profitability in the industry, with claims estimates upwards of £800m for the flooding in total.

Catherine comments: “With household profitability also under pressure, it is increasingly important that the concerns about the underlying mechanics of the motor insurance market are addressed or consumers could be facing price hikes across the board.”