The profitable NCR was principally driven by the COVID-19 lockdowns which resulted in a 20% fall in vehicle usage[1] and a subsequent 28% drop in the number of motor claims[2]. However, premium rate cuts in Q1 2021 and the upcoming FCA pricing reforms will contribute to this profitability being short-lived, despite the whiplash reforms finally taking effect from May. EY predicts that the Net Combined Ratio (NCR) for 2021 will be a loss-making 103%, falling further into the red in 2022 with an NCR of 112%.
Premiums set to fall 6% in 2021 due to gear change in car usage patterns and whiplash reforms
Car usage patterns have changed dramatically over the past year as a result of the national lockdowns. While premiums remained relatively stable until the end of 2020, they dropped by 7% in Q1 2021 (a fall of £32 per policy compared to Q4 2020) as insurers were better able to predict the effects of the latest restrictions.
The final whiplash reforms - part of the Civil Liability Act 2018 – will also impact premiums this year, driving a further fall. The reforms came into effect on 31st May 2021 and aim to reduce both the legal costs associated with whiplash claims and the overall level of compensation.
A third material driver to falling premiums will be insurers looking to defend market share and retain customers amid the recently announced FCA pricing reforms. Overall, EY predicts that consumer premiums will remain low throughout 2021, with rates on average 6% (equivalent to £27 per policy) lower this year than in 2020.
Tony Sault, UK General Insurance Market Lead at EY, commented: “The drop in claims last year meant insurers were able to pass on savings to their customers through reduced premiums in Q1 2021. As commuting patterns change, perhaps for good, we expect the downward shift in car usage and claims to continue - albeit not to the level seen in lockdown. We also expect lower premium rates to continue for the rest of this year as insurers price in these behavioural changes as well as the new rules on whiplash claims and focus heavily on retaining customers ahead of the FCA pricing reforms.
“While lower premiums is good news for consumers, the sector faces ongoing and significant underlying cost challenges - which were to a large extent masked by the lockdowns - and the rise in profitability in 2020 will likely be a blip. Motor insurers continue to face the same repair inflation trends they have been struggling with for years, and now will have to factor in the higher compliance costs related to the FCA’s pricing rules as they re-balance the premiums offered to new and existing customers.”
Rodney Bonnard, UK Insurance Leader at EY, concluded: “There has been a great deal of disruption over the past year and the challenging market environment is set to continue, compounded by an increasingly soft market and a ramp up of regulatory requirements. In particular, while the drive by the FCA to deliver fair value to customers is welcome, it will require insurers to carry out significant work and bear the costs of implementing major changes in a tight time frame. As ever, making the necessary investments in innovation and digital transformation will prove crucial for firms to deal with the challenges head-on, not least as they battle for competitive advantage.”
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