- UK motor insurance 2019 Net Combined Ratio (NCR) was unprofitable 100.8% following 2018’s best result on record (94.7% NCR)
- Lockdown impact likely to return motor insurers to temporary profitability in 2020 (with a predicted NCR of 94.8%), but expected to fall back into the red in 2021
- Premiums expected to fall slightly over 2020, with customers saving on average £20 per policy
The current COVID-19 lockdown, and resultant reduction in motor claims, is likely to mean UK motor insurers will return to profit in 2020, according to EY’s latest UK Motor Insurance Results Analysis. However, the sector is facing significant headwinds from underlying inflation, as well as the pressure of reduced rates, which are expected to push it back into the red in 2021, assuming the UK doesn’t suffer a second wave of the virus and subsequent lockdown.
EY predicts that the Net Combined Ratio (NCR) for 2020 will be 94.8% as a result of a lower volume of claims, even when taking into account expected premium refunds and rate cuts. The sector is, however, forecast to be loss-making in 2021, with an NCR of 105%, as the impact of reduced rates and ongoing inflation continues to bite.
Root causes of 2019 loss
In 2019 the industry’s NCR was 100.8%; an increase of over 6% from 2018’s record breaking year (94.7% NCR). A lower than expected Ogden Discount Rate for personal injury claims is one of the key reasons for a loss-making NCR, exacerbated by low premium rates and high claims inflation.
Tony Sault, UK General Insurance Market Lead at EY, commented: “The full economic impact of COVID-19 is of course yet unknown. For motor insurers, the lockdown has resulted in fewer cars on the road, meaning fewer accidents and fewer claims, so it is unsurprising that this will be reflected positively in insurers’ annual results – but this is an anomaly, not the start of a new trend.
“Lockdown is masking some of the sector’s underlying difficulties, and once driving habits return to normal, insurers will face the same profitability challenges they have been contending with for years. The current challenge is to strike the right balance between short term discounts and premium refunds with longer term fairer pricing models, while taking the opportunity to build up struggling reserves to shield against ongoing uncertainty. Overall, while the motor market may see an uptick this year, most insurers have diversified portfolios, and although today’s results brings positive news for motor lines, it will only go so far in offsetting losses brought about by COVID-19 on other insurance lines.”
Consumers set for lower premiums
EY expects premium rates to be 1.8% lower in 2020 compared to 2019; this assumes 2019 rate rises will be offset by lower motor insurance demand in light of a worsening economy. In addition, EY predicts up to 2.5% of 2020 premiums will be returned to customers through refunds, mid-term adjustments and other incentives (for example, free breakdown cover and no excess for NHS staff and keyworkers). Overall, average premiums are expected to be £20 lower per policy in 2020 compared to 2019.
COVID-19 delays Whiplash reforms and the FCA Market Study
The Whiplash reforms - part of the Civil Liability Act - which had been due to be implemented later this year, have been pushed back to April 2021 due to COVID-19. These reforms are expected to reduce both legal costs associated with whiplash claims and overall levels of compensation, resulting in cost savings for consumers in the form of lower premiums.
The final report from the FCA on the General Insurance Pricing Practices Market Study, which is likely to signal significant change to pricing models, has also been delayed due to the crisis.
Rodney Bonnard, UK Insurance Leader at EY, concludes: “Although delayed, the anticipated benefits of the Whiplash reforms, together with the short-lived improvement to this year’s performance and continued market competition, mean consumer premiums are likely to fall over 2020. This will be helpful for car owners, especially at this financially challenging time. However, with the market softening rapidly and the fair pricing regulation likely to cause considerable disruption when it lands, the sector is facing increasing pressure.
“While the recent lockdown has been challenging in many ways, one of the things it has shown us is the importance of technology in maintaining business continuity and ensuring strong customer communication. As insurers compete in a softening market, investment in digital transformation and new innovation will be ever more crucial as they look to differentiate their propositions to meet the needs of customers in the challenging years ahead.”