Motor insurance underwriting in 2014 will return to being a loss-making product after just one year (2013) in the black, according to EY’s annual UK motor insurance results seminar. The forecast for 2014 suggests that in order to reach a net combined ratio (NCR) of 100, reserve releases would need to hit unprecedented levels of 14%, and as a result, in the long term premiums will inevitably be forced to rise.
Catherine Barton, head of Retail Property & Casualty Actuarial, EMEIA at EY, comments “Repeating the NCR of 98.5 in 2013 looks nigh on impossible for 2014. Insurers are experiencing continued premium reductions while claims inflation-although less rampant than in recent years-is still tracking close to inflation. This can’t be expected to go on forever, making a premium rise in the near future inevitable."
The forecast for an NCR of 109.3 in 2014 still requires insurers to release 5% from their prior year reserves, which is 2.2% less than in 2013. In the past decade alone, reserve releases have varied from 13% release to 1% strengthening, but a 5% release is not insignificant.
Barton continues “Reserve strength is key to understanding how much of a buffer insurers have to support their current year underwriting performance, and whether they can present positive results to their shareholders. The high reserve releases seen in 2013 were driven by just a small number of insurers rather than the whole market, and if similar high levels are not seen in 2014, the overall market performance could be even worse than our prediction.”
EY predicts an NCR of 114.5 in 2015, which will see further loss-making in motor insurance underwriting, and highlights a real move away from any possible profit trend.
The size of claims is rising, but premiums have dropped
Premiums continue to fall, and have dropped 6% year on year. The forecast for claims inflation is 1.3% in 2014, and increases to 2.6% in 2015. This is driven by sustained bodily injury claims inflation, which mainly affects larger claims.
Barton adds “In spite of considerable reform in the motor market, claims costs continue to rise. Most focus to date has been targeted at controlling small claims costs. As reform hasn't been designed to deal with the cost of large claims, unsurprisingly they are still increasing.
In such an already competitive market, the proposed Competition and Markets Authority (CMA) changes are likely to put pressure on profitability. Further, the CMA's focus on add-on product sales will likely pile pressure on insurers to make their money from underwriting rather than from add-on products.
Ultimately, motor insurers still need to make money. Sooner or later underlying price rises for consumers will be inevitable for the market to be sustainable."
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