Motor insurance premiums will be forced to rise from next year, as 2014 sees the industry plummet back into the red, after just one year of profit-making, according to EY’s biannual UK motor insurance results. Motorists are expected to experience an average 2% rise in the price of insurance. This is equivalent to a £7 annual increase, and ends the 13% drop in premiums seen over the last two years.
Catherine Barton, Head of Retail Property & Casualty Actuarial, EMEIA at EY, comments: “The motor market profit in 2013 was nothing more than a hotly anticipated blip, which makes it less surprising that premiums now need to go up. However, with claims inflation rising at a faster rate than premiums, a 2% rise won’t be enough to begin to curb the industry’s long-term unprofitability. So, 2015 may be the start of a trend of rising premiums for consumers."
The forecast for claims inflation is 3.1% in 2014, increasing to 4.4% in 2015.
Catherine comments: “The LASPO Act has seen the motor market undergo significant reform in terms of controlling small claims costs, but has not dealt in any detail with the cost of large claims, which continue to rise. Motor insurers will have no choice but to pass some of this pain onto their customers.”
Reserve releases fail to fill the gap
The forecast for 2014 suggests that in order for the industry to achieve a profit, reserve releases would need to reach around 13% for the second time in under a decade. Assuming a lower reserve release of 5% (2.2% below the release reported in 2013), the industry would only achieve an NCR of 108.2%, which would mean that profitability in 2014 would have fallen almost 10%. Insurers managing profitability through leveraging the reserves made in previous years is a current area of focus for the PRA.
Catherine continues: “Reserve strength is currently an area of scrutiny by the regulators, but our analysis demonstrates how motor insurers are currently against a rock and a hard place. Even by dipping into reserves, they are far from returning a profit, and this buffer, which insurers rely on to support their current year underwriting performance, is under significant pressure.”
EY predicts that with a similar release of reserves in 2015 alongside a widening gap between premiums and claims costs, underwriters will only achieve an NCR of 112.5%, which highlights a further move away from profit-making.
“Clearly, if the motor insurance market is to be sustainable, it cannot exist in perpetual unprofitability. Something needs to give, which will inevitably translate into price rises for consumers in the short term. However, gradual increases in the price of insurance would protect against an extreme hike when insurers reach breaking point.”
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