The UK motor insurance market is expected to record an underwriting profit in 2020, according to EY’s UK Motor Insurance Results, due to the COVID-19 lockdowns and resultant reduction in motor claims with costs expected to fall by 12%. The Net Combined Ratio (NCR) for 2020 is predicted to be 93.8%, a 7.2% improvement on 2019’s performance.
However, the sector is facing headwinds from underlying inflation and the impact of the FCA’s pricing review which are expected to squeeze profitability and push it back into the red in 2021. EY predicts that the Net Combined Ratio (NCR) for 2021 will be a loss making 103.7%.
Tony Sault, UK General Insurance Market Lead at EY, commented: “The pandemic continues to have a major impact on people, economies and industries across the globe, including the insurance industry. COVID-19 related insurance pay-outs and business interruption present challenges for growth in the UK insurance sector as a whole. For motor insurers, however, the lockdowns have resulted in fewer cars on the road, meaning fewer accidents and fewer claims, so it’s not surprising that this will be reflected positively in their results. While the sector has passed back some of these benefits through premium reductions and refunds, for many insurers 2020’s results for motor will only go so far in offsetting COVID-19 losses on their other insurance lines.
“The lockdowns are masking some of the sector’s underlying cost challenges and next year motor insurers will face the same repair inflation trends they have been contending with for years. On top of that, there’s the end of the Brexit transition period and the FCA’s proposed pricing rules meaning higher costs for general insurers next year as they make the necessary changes and balance the premiums offered to new and existing customers.”
Shift in car usage patterns and whiplash reforms could lead to lower premiums
Car usage has significantly reduced this year due to COVID-19 and the subsequent lockdowns, with the almost overnight shift to home working and the increase in online shopping. EY expects this downward shift in car usage to continue next year, with fewer people commuting which will lead to less accidents and lower claims. This benefit is expected to be passed onto consumers in the form of lower premiums.
Recent changes in purchasing patterns with increased interest in subscription style propositions such as ‘Pay As You Drive’ could also lower premiums.
In addition, the whiplash reforms - part of the Civil Liability Act 2018 – although delayed, could result in lower premiums when they do come in. The reforms are expected to reduce both legal costs associated with whiplash claims and overall levels of compensation.
Rodney Bonnard, UK Insurance Leader at EY, concludes: “The whiplash reforms were pushed back to April 2021 earlier this year, but the continuing rise of COVID-19 cases could mean this date is pushed back further. While the reforms are likely to lead to lower premiums for consumers when they do come in, it’s unlikely insurers will price discounts in before there’s more certainty around the date.
“This year has been full of uncertainty and disruption, however, one of the things we’ve learned is the importance of technology in maintaining business continuity and communicating effectively with customers. As insurers compete in a softening market, investment in innovation and digital transformation will be ever more critical as they look to differentiate their customer offerings.”