By Ed Harrison, Partner at LCP
As we all ease ourselves back behind our desks after the summer break, this article considers some of those key trends in personal motor, following on from last month’s article on Household and Travel.
Damage inflation
The big talking point at present is damage inflation. Insurers face pressure on all aspects of damage claims, from repair and replacement costs through to credit hire fees.
Repair costs have been increasing rapidly since the Covid-19 pandemic as supply chain disruption led to a scarcity of parts and dramatic increases to shipping costs. Costs have been further exacerbated by the Ukrainian conflict.
Vehicle replacement costs have also increased significantly. Supply chain disruption has driven lead times on new vehicles up, leading to a greater demand for second-hand vehicles, and consequent value increases of 20-30% for some models. For insurers, this second-hand vehicle demand has significantly increased the costs of vehicle write-offs.
Credit hire costs are also increasing, because repairing vehicles is taking longer than pre-covid. This is as a result of supply chain disruption meaning replacement parts can be hard to source, but also due to staffing shortages at many garages extending waiting times.
Whiplash reforms
By introducing the “Official Injury Claim” (or OIC) portal in Q2 2021, the government intended to curb opportunistic and excessive claims for whiplash and minor soft tissue injuries that were driving increases to premiums.
A year on from the introduction, government estimates of a £30 reduction in cost per policy appear to be more realistic than many insurers expected at the time.
Claim frequencies have reduced across the market by circa 20%. The main driver of this reduction appears to be a drop-off in claims in the lowest tariff bands. The most likely cause is potential claimants (and claims management firms) considering the claim value too low to pursue claims.
Whilst there is more “buy-in” to frequency reduction trends than a year ago, there remains a residual concern that reporting and settlement delays may be longer than insurers expect. Two particular concerns are:
• Incubation of claims: There is a risk that claims may be reported at a late stage by claim management companies when there is evidence of a longer lasting injury, which gives access to the higher tariff bands and a better payout.
• Dormant claims: Many insurers are finding a large number of claims notified to the portal which remain open, but have not progressed beyond the initial stages. As the OIC process is new, a key judgement is the propensity of these claims to settle for nil.
Ogden discount rate
The Ogden discount rate was set at its current value of -0.25% by the government in July 2019. The next review is due no later than July 2024.
Inflationary trends and whiplash reforms have pushed consideration of the Ogden rate down the actuarial agenda, but it is likely to be a key area of focus as we approach year-end. This is because large injury claims typically take 3-5 years to settle, so an ever increasing proportion of insurers’ large injury reserves are expected to settle after the 2024 rate review.
Predicting the next Ogden rate is almost as challenging as predicting inflation. The move from 2.5% to minus0.75% in 2017 took the industry by surprise, and most insurers predicted a higher rate than -0.25% would come out of the 2019 review.
At the start of 2022, most of the lead indicators for the rate suggests an even more negative rate coming down the line in 2024. The basket of investments used by the GAD was seeing returns of -1.5% and a rate of -1.75% was set in Northern Ireland in 2021.
The conflict in the Ukraine has created significant market volatility, which makes it challenging to draw inferences the GAD basket of investments. If such volatility persists in the lead-up to the next review, it may add to calls for a dual rate.
A dual rate would likely have a stable long term component, alongside a more regularly adjusted short-term discount rate. This approach might be an attractive proposition to insurers as it would reduce the risk around each 5 yearly Ogden rate review and the volatility of reserves as a result of such reviews.
Where next?
The motor market remains challenging – but this is certainly nothing new. Damage inflation has run higher than background price inflation for many years, the distortions due to whiplash reforms may look small compared to changes in driver behaviour that the market had to contend with during the Covid-19 pandemic.
The dynamic nature of the market highlights the need to have robust and flexible reserving, pricing and capital setting processes.
Despite the challenging market, motor insurers are blessed with a volume and richness of data that London Market business can only dream of. Investing in market leading reserving, pricing and underwriting tools and processes has never seemed a better bet!
|
