The ECJ Gender Directive, which comes into force on Friday could reduce the overall profitability of the UK motor insurance market by 2% in 2013. The motor insurance market is expected to come close to breaking even this year after failing to make an underwriting profit since the early 1990s. When the Gender Directive comes into play, along with other legislation, it will make an underwriting profit even harder to achieve.
Analysis of the most recent motor insurance results shows that premiums have increased or held better than expected so far in 2012 and that the motor insurance market is expected to come close to breaking even. Allowing for investment returns, insurers could make a standard return on capital of 12% gross of tax on their motor books for the first time in over a decade. The industry should report a profit if income from ancillary products(such as referral fees, motor legal protection and installment income) is included, however legislation threatens continued profitability in 2013.
Catherine Barton, partner in Ernst & Young’s financial services team, comments “At best the market will only just break even this year and the Gender Directive, along with a combination of legislative and market pressures next year, will put continued profitability under threat. Those players who are less reliant on referral fees, and who have strong anti-fraud and claim process measures in place, will outperform, but the market as a whole will struggle to make an underwriting profit in 2013.
The last time that the whole market changed rates on a single date was when the motor tariff was removed in 1968, and this caused significant performance volatility and several years of unprofitability. While we do not expect the Gender Directive to have such a large impact it will definitely create volatility which could damage profitability in the short term.”
When the motor tariff was removed the combined operating ratio (COR) increased dramatically, rising from 98 in 1968 to 107 in 1969, and 114 in 1970 and only recovered in 1972. In contrast to the removal of the motor tariff, which affected the whole market, the Gender Directive will only have a significant effect on approximately a third of the market premium-in particular young driver premiums-and so will have a smaller and less lengthy impact than the dissolution of the motor tariff. However, it is likely to destabilise the market and if it causes similar levels of volatility, the market could suffer losses of 2-4 on the combined ratio over the next year or two.
|
