By Ed Harrison, Partner at LCP
This article summarises the key highlights and trends.
Motor
Our prediction is a market net combined ratio of 96% in 2024, down significantly from the 113% reported in firms’ 2023 year-end SFCRs. The performance improvement comes off the back of significant rate increases, with average written premiums rising 34% between Q4 2022 and Q4 2023.
The hard market looks to have ended, with average premiums stabilising at around £625 over the past 2 quarters, according to the ABI tracker. Our market predictions assume a slight reduction in rates due to competitive pressure throughout the remainder of 2024 and into 2025.
Despite the recent premium rises, underlying challenges in the market remain. Our projections assume that long-standing above-CPI inflation will continue on both own-damage and 3rd-party damage perils. This in-turn leads the market back to more marginal profitability in 2025, with our forecast rising to 99% for next year.
The key uncertainty for the motor market is the Ogden discount rate. Real yields (40 year duration) have moved from about -1.5% when the rate was last set to circa +1.25% at December 2024, giving scope for the new rate to be significantly higher than the present one. Our forecasts assume a rate of +0.5%, but there is a lot of uncertainty and many of the providers that we speak to continue to reserve at -0.25% at present, pending clarity on the new rate.
Whilst the Ogden rate drives large injury performance and affects prior year reserve releases, smaller injury claims are also subject to significant change. Updates to judicial college guidelines, an anticipated review of the whiplash tariffs, and the recent Supreme Court ruling on mixed injury claims are all likely to put upward pressure on average costs. Recent above-inflation public sector pay rises may also contribute.
Home
Our prediction is a market net combined ratio of 106% in 2024. Whilst not profitable, this still represents an improvement on 2022 and 2023, when combined ratios peaked at 122% according to the ABI data. Rates have risen significantly in the home market since 2022 Q4, with the average written premium increasing from circa £305 to around £365. Unlike the motor market, we see no evidence of softening yet on home business. Our expectation is that the hard market will continue into early 2025 before premiums flatten off.
The higher premium rates we expect the market to write in 2024 and earn in 2025 drive the significant performance improvement in net combined ratio that we expect to see over the same period.
On the claims side, frequencies across all major perils are expected to remain either constant or reduce slightly. The major drivers of adverse experience in 2022/23 have been significant above-inflationary increases in the cost of repairs following escape of water, fire and subsidence claims. These in turn are attributable to significant increases in building materials costs and labour rates, with an added difficulty of securing appropriately experienced tradespeople.
The subsidence surge in 2022 also continues to affect the market today, with a number of firms reporting prior year reserve deteriorations as the true cost of underpinning / repairing affected properties becomes known.
Ultimately, overall household performance can be volatile, as a result of weather and catastrophe experience. Recent talk of climate tipping points highlights the risk that the frequency of flood and storm events may increase in the future. We may only see the trends with the benefit of hindsight! Average repair costs are likely to be affected in the same way as escape of water and fire. In addition, the dry summer of 2022 brought wildfire risk to the UK market for the first time, bringing with it modelling and exposure management challenges for market participants.
A turbulent outlook
Overall, household performance looks likely to improve over the next 18 months, whereas motor seems likely to enjoy brief profitability in 2024 before returning to more marginal territory in 2025. Both markets have their own unique challenges and changes in performance can occur quickly. Firms that invest in more sophisticated and agile pricing and reserving processes, and which create strong feedback loops between them, will be best placed to identify performance issues at an earlier stage and then respond appropriately to them.
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