- Home and motor insurance profits in 2021 are expected due to lower claims volume during the lockdown and changing driving patterns
- But 2022 expected to be loss-making for both insurance lines of business as inflation remains high and premium rates are suppressed due to FCA pricing reforms
- Significant uncertainty lies ahead, as increased remote and hybrid working impact claims patterns along with ongoing trend of claims inflation
The UK home and motor insurance markets are expected to achieve profitability this year due to low claims levels, but will fall into the red in 2022, according to EY’s latest analysis.
UK motor insurance results
Updating on June 2021 data, UK motor insurers are now expected to achieve an underwriting profit in 2021 with a Net Combined Ratio (NCR) of 97%. The improvement in profitability from the June forecast (103.7%) is due to ongoing low claims levels as changed driving patterns persist. However, the NCR in 2022 is predicted to return to a loss making 112%, with claims costs expected to be 25% higher than in 2021, due to the lockdown in the first part of this year. Underlying inflation, premium rate falls and costs associated with the FCA’s Pricing Review will also impact profitability.
Premiums set to fall 7% in 2021 - £33 per policy cheaper - due to change in car usage patterns and whiplash reforms
Car usage patterns have changed dramatically over the past eighteen months as a result of national lockdowns and an increase in remote working. While premiums remained relatively stable until the end of 2020, they have dropped over the course of this year.
The launch of the new whiplash claims process has also impacted premiums, driving a further fall. The reforms came into effect on 31st May 2021, with the aim of reducing both the legal costs associated with whiplash claims and the overall level of compensation.
A third factor driving falling premiums are insurers looking to defend market share and retain customers ahead of the FCA pricing reforms. Overall, EY predicts that consumer premiums are set to fall 7% in 2021, making motor insurance £33 per policy cheaper on average compared to 2020. This will make premium rates this year the lowest since 2015.
Tony Sault, UK General Insurance Leader at EY, comments: “Despite overall traffic volume returning close to 2019’s level, motor claims remain lower than expected. This is due to material shifts in driving patterns that appear to be sticking; there are fewer cars on the road during rush hour and less motorway journeys. Consumer premium rates look set to be 7% lower this year compared to last as insurers price in these behavioural changes as well as the new rules on whiplash claims and focus on retaining customers ahead of the FCA pricing reforms. Looking ahead, the outlook for high inflation is set to dampen profitability.”
UK home insurance results
UK home insurers are forecast to achieve only a slim profit in 2021, with high inflation negating much of the benefit of lockdown-related low claims, before falling into loss-making territory in 2022. The NCR for 2021 is predicted to be 99.4%, worsening on the previous year (97.6%) when claims volumes fell more significantly due to the multiple lockdowns. Profitability, however, isn’t likely to last long, and the industry is expected to end 2022 with a loss-making NCR of 101.6%.
Uncertainty surrounding COVID-19’s ongoing impact
COVID-19 and the resultant move to hybrid working has meant that significant swathes of the UK workforce are spending more time at home compared to pre-pandemic, resulting in mixed outcomes for home insurers. While increased home occupancy has led to a reduction in theft claims it has, conversely, increased accidental damage claims. In aggregate, throughout 2021 to present, claims volumes have remained at a relatively low level, although higher than in 2020 (2021 non-weather claim volumes are forecast to be 2.7% higher than in 2020). 2022 claims volumes are expected to return closer to longer-term trends, which were already on a downward path, with structural shifts due to the move to hybrid working. Non-weather claim volumes are forecast to drop marginally 0.6% year on year (2021 to 2022).
Bad weather in 2020 led to a deteriorating loss ratio
2020 experienced higher than average flood and storm damage, deteriorating the loss ratio by 5%. While the weather in the first half of 2021 was fairly benign by industry standards, the claims driven by flood events in Q3 are yet to materialise in the data, leaving uncertainty around the full year weather impact on UK homes.
Claims inflation and premiums set to rise over the remainder of 2021
Claims inflation is forecast to pick up dramatically in 2021 as a result of ongoing supply chain, energy and workforce challenges, as well as higher than usual levels of inflation, which are expected to persist into the first half of 2022. Overall, home insurance premiums are predicted to be 1.5% higher over H2 2021 than they were in 2020 as insurers respond to inflationary pressures, but to be flat over 2022 when the new FCA pricing regime comes into force, with insurers’ likely to forgo some profit to retain market share.
Tony Sault comments: “While the home insurance sector is set to be profitable this year, it is likely short-term and high inflation will be a drag on profitability levels into 2022. The costs associated with the regulator’s pricing reforms will also add to the sector’s financial challenges as they look to overhaul their pricing models. However, premium rates are expected to remain fairly flat over 2022, and particularly the established players are likely to sacrifice profit in the short-term to protect their market share.”
FCA pricing reforms will have a major impact on the market in 2022
The FCA pricing regime comes into force from 1st January 2022 and will represent one of the biggest regulatory interventions ever seen in the general insurance market. From this time, firms will not be able to charge renewing customers any more than they would if they were a new customer. Pricing structures are in the process of being rebuilt to comply but there remains a high degree of uncertainty as to how overall premiums across home and motor lines will be impacted going forward. While the effect it will have on individual policyholders will vary depending on their historical propensity to switch, the transition period will undoubtedly be challenging and heavily reliant on competitive dynamics.
Rodney Bonnard, UK Insurance Leader at EY, concludes: “While there are a number of known challenges and opportunities as we look ahead, there is a great deal of uncertainty too. COVID-19 has had a significant impact on claims patterns and costs over the last eighteen months and while we are expecting some of this to unwind over the coming months as more people return to the office, no one knows if there will be further lockdowns, how hybrid working will settle in, and how much life really will return to the pre-pandemic ‘normal’. There is also uncertainty around how long the high inflation we’re currently seeing will last and how this will play out in claims data during the remainder of 2021 and into 2022.
“There is certainly a lot for the home and motor insurance industries to contend with and overcome if they are to achieve profitability over the coming years. Important issues to get on top of increasingly include ESG, which is in the spotlight now amid COP26. Insurers have a vital role to play to counter climate change both internally and as the major players in the flow of green capital.”